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Determination of Share Price: Evidence from Karachi Stock Exchange

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Author Info

  • Muhammad Farhan Malik

    ()
    (MS-Management Sciences (Finance) Scholar, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad (Pakistan))

  • Muhammad Usman Qureshi

    ()
    (MS-Management Sciences (Finance) Scholar, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad (Pakistan))

  • Muhammad Azeem

    ()
    (MBA (Finance) Scholar, Air University, Multan (Pakistan))

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    Abstract

    Share price determination is a contradictory task, affected by lots of factors. However some methods and techniques under different schools of thought have been developed for this purpose. Study reviews the important factors and philosophical developments on the subject. It discusses determination of share price using Ohlson (1995) model. Two forms of the model are employed; one is linear valuation model and second is the non-linear product model. Latter uses the product of earnings and book value as third independent variable, in addition to traditional linear valuation model. Research employs book value per share (BVPS) and earnings per share (EPS) as used by several other authors. Empirical findings are based on the sample of fifty two companies from the Karachi Stock Exchange (KSE) drawn systematically on the basis of highest market capitalization. Eight years of 21st century (2002 to 2009) are chosen as study period. Statistical investigation using Fixed Effects Model (FEM) shows strong evidence for applicability of Ohlson model for KSE listed companies. It also shows that the published financial information is useful for shareholders, and fundamental analysis is pertinent with KSE to a larger extent. However product model of valuation has small improvement for valuation of companies. Adoption of more fair value accounting rules could increase this determination power.

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    Bibliographic Info

    Article provided by Department of International Business and Economics from the Academy of Economic Studies Bucharest in its journal Romanian Economic Journal.

    Volume (Year): 15 (2012)
    Issue (Month): 43 (March)
    Pages: 97-114

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    Handle: RePEc:rej:journl:v:15:y:2012:i:43:p:97-114

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    Related research

    Keywords: Share Price; Earnings; Book value; Ohlson Model; Value Determination;

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    References

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    1. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
    2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    3. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
    4. Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 953-1001, October.
    5. Brown, Stephen & Lo, Kin & Lys, Thomas, 1999. "Use of R2 in accounting research: measuring changes in value relevance over the last four decades," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 83-115, December.
    6. Marsh, Terry A. & Merton, Robert C., 1984. "Dividend variability and variance bounds tests for the rationality of stock market prices," Working papers 1584-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Flavin, Marjorie A, 1983. "Excess Volatility in the Financial Markets: A Reassessment of the Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 929-56, December.
    8. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
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