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The Determinants of Stock Prices in Pakistan

  • Mehr-un-Nisa

    (Ph.D Scholar at University of Karachi, Karachi, Pakistan)

  • Mohammad Nishat

    (Professor Department of Finance and Economics, Institute of Business Administration, Karachi, Pakistan)

Registered author(s):

    Stock Investment is always a risky proposition and investors are reluctant to invest in Stock Market. If they came to know about the exact factors influencing the stock prices, they will invest in stocks confidently. This study examines the empirical relationship between the stock prices, financial fundamentals and macroeconomic factors in Karachi Stock Exchange. By applying the dynamic panel Generalized Method of Moments (GMM) technique on the data of 221 firms during 1995-2006, the analysis attempts to obtain efficient parameter estimates and to check the consistency of the link between stock price behavior, company fundamentals and macroeconomic factors. Several studies have been conducted to identify the factors of stock prices for a variety of countries, and the results have been mixed. It is found that previous behavior of stock prices, company size, previous earnings per share are the most important factors. In addition, macroeconomic indicators like, GDP growth, rate of interest and financial depth have significant relationship with the stock prices. Market to book value, share turnover ratio and inflation can also influence the stock price behavior. The corporate reforms of 2002 are responsible of increase in stock prices from 2002 to 2006. Investors in Pakistan have to decide which stock should be purchased. The results of this study will provide guideline to the investors in stock selection. While taking decisions they should take into account company informations as well as macroeconomic situation of the country simultaneously. The companies can set their policies and strategies in the light of relatively important factors, for business survival and success. The possible impact of macroeconomic factors may help the policy makers while setting monetary and fiscal policies.

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    Article provided by Asian Economic and Social Society in its journal Asian Economic and Financial Review.

    Volume (Year): 1 (2011)
    Issue (Month): 4 (December)
    Pages: 276-291

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    Handle: RePEc:asi:aeafrj:2011:p:276-291
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    1. Fazal Husain & Abdul Qayyum, 2006. "Stock Market Liberalisations in the South Asian Region," PIDE-Working Papers 2006:6, Pakistan Institute of Development Economics.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
    4. Husain, Fazal & Mahmood, Tariq, 1999. "Monetary Expansion and Stock Returns in Pakistan," MPRA Paper 5020, University Library of Munich, Germany.
    5. Husain, Fazal & Mahmood, Tariq, 2001. "The Stock Market and the Economy in Pakistan," MPRA Paper 4215, University Library of Munich, Germany.
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