Determining the Impact of Dividends, Earnings, Invested Capital and Retained Earnings on Stock Prices in Pakistan: An Empirical Study

Abstract

Investment in capital market is always subject to high volatility and consequently evaded by risk averse investors. An analysis of the key factors behind variation in stock prices can motivate investors to inject their money into the capital market and invest in shares of listed companies. Ample researches have been conducted to explore the determinants of stock prices comprising company’s specific as well as macroeconomic factors. However, this study is focused on excogitating the relationship between selected companies’specific factors and stock prices of companies listed on Karachi Stock Exchange of Pakistan. These include dividend per share, earning per share, capital employed and retained earnings. Estimated Generalized Least Square (EGLS) has been used for analysis of data based on a sample of 99 listed companies for a period of six years from 2006 to 2011. Findings indicate that dividend per share and earning per share Possess positive and significant relationship with market prices,meaning by an increase in these variables tends to increase stock prices. These findings are consistent with those of the previous researches. However, capital employed and retained earnings are found to have statistically insignificant relationship with stock prices. It may be due to collection of data from different sectors and limited number of data observations for the study. This study captures descriptive analysis as well as panel regression for better and in-depth analysis of selected fundamental variables on stock prices and led us to the conclusion that companies should focus on earnings per share and dividend per share to get desired financing and for well-being of economy.

Keywords: Estimated Generalized Least Square (EGLS), Company’s Specific Factors, Stock Prices, Capital Market

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