Behavior of Stock Prices in the Saudi Arabian Financial Market: Empirical Reserach Findings

Introduction The Saudi Arabian financial market (SFM) was first established in 1984 commencing with a very limited number of firms. It is in fact one of the latest financial markets established in the Arab world. However, economic development, prosperity and growth in the Saudi Arabian economy witnessed in the last decade or so were in favor of the SFM to grow rapidly in the number of firms and market capitalization. Table 1 presents some indicators of the growth of the SFM. Despite the growth noticed in the SFM, it still is a relatively small and thin market. Furthermore, despite the ever increasing trend in depth and size of the market Table 1 suggests that there are irregularities in trading. In addition to the above, the SFM has a unique stock exchange mechanism, the most apparent characteristics of which is that official trading is over the counter via Saudi commercial banks only and are not allowed to take part in the stock exchange for their accounts. In practice, however. a number of stock exchange offices are operating with no official status. Furthermore, at the primary market level, no financial institutions (investment banks, and managing bank) are, found in the SFM nor are there government bonds dealers. The objective of this study is to seek evidence supporting the existence of trends towards weak form efficiency in the Saudi financial market (SFM). It mainly concerns itself with testing empirically the behavior of common stock price, and exam ine whether or not common stock price in SFM behave in the form of random walk. The statistical tests include a sample firms from all economic sectors in the Saudi financial market (SFM) as reported by the Saudi Arabian Monetary Agency (SAMA), i.e., (banks, industrial, cement, services, and agriculture). The number of firms listed in the SFM is relatively very small compared to developed stock markets. Prelude An efficient market can be regarded as a market where information about securities is available and rapidly reflected in the prices of these securities. Market efficiency is of two kinds, these are: external efficiency and internal efficiency. By external efficiency also called pricing efficiency it is meant that information relevant for pricing securities is made public rapidly and theoretically with no cost, to reach all investors at the same time, and will be rapidly reflected in the prices of securities in the market. This will at least theoretically assure a fair game for all investors. However, internal efficiency also called operational efficiency, relates to the cost and speed of operations in the market. The more rapid and the less costly operations are, the higher internal efficiency is. More importantly, market efficiency can take many forms. Fama1 defined three types of market efficiency, namely: weak form efficiency, semi-strong form efficiency, and strong form efficiency. Strong form efficient market is one where all information whether publicly available or not is reflected in security price, and that investors are unable to make excess returns from any additional analysis of both securities and the market. Semistrong form efficient market is one where publicly available information is reflected in security price, and investors are unable to make excess returns from the use of annual reports, dividend information, earnings announcements, and all other information that are made public. A weak form efficient market, however, is one where knowledge of historical prices and returns cannot enable investors to make excess returns. It must be understood, however, that it requires some necessary conditions to be present for a market to be efficient. Efficiency is associated, therefore, with the degree of market organization: the highly markets are organized, the better the chances they are efficient. The New York and other European financial markets can be taken as examples where most necessary conditions for efficiency are present, such as, investors, security analysts, dealers, brokers, market makers, motivated and competent market observers, as well as governing bodies and financial institutions (investment banks and managing bank). …