Key fundamental factors and long-run price changes in an emerging market - A case study of Karachi Stock Exchange (KSE)

Abstract

This paper identifies the joint effect that multiple factors exert on share prices in Karachi Stock Exchange (KSE), using annual balance sheet data of listed firms during 1981 to 2000. Out of six theory-suggested fundamental variables (dividend yield, payout ratio, size, asset growth, leverage, and earning volatility), the highly significant joint factors observed are payout ratio, size, leverage, and dividend yield. Together, these four factors explain one-fourth variation in share prices at KSE. The explanatory power of fundamental factors is found to be different in the pre-reform period (1981-1990) and the post-reform period (1991-2000). In the pre-reform period, three factors, i.e., payout ratio, size, and dividend yield, explain about half of the variation in share prices, whereas during the post-reform period these factors explain about one-third of the variability in these prices. The correct sign of size effect is only observed in the pre-reform period.