Explaining the Cross Section of Stock Returns: A Comparative Study of the Pakistan and India

Abstract

The study is conducted to provide significant evidence to assess the impacts of P/E ratio (price to earnings ratio), P/B ratio (price to book ratio) and D/E ratio (debt to equity ratio) on stock returns by amassing data of companies list on KSE in Pakistan and BSE in India over the period of 2010 to 2014. The annual compound returns are calculated on the bases of average of the past 12 monthly returns for each company. To effectively assess the relationship between variables used panel data approach and revealed that that price to book ratio and debt to equity ratio have positive and price to earnings ratio have negative impact on stock returns in Pakistan. In India, Price to earnings ratio and price to book ratio have positive while debt to equity ratio have negative impact on stock returns. The Markowitz Portfolio theory, Capital Assets Pricing model (CAPM) and Fama and French theories support to the findings of the study. The study have implications for investors, policy makers and shareholders to makes financing decision and suggested that independent variables have higher explanatory power which are statistically significant in explaining the cross-section of stock returns in both country.

Keywords: Stock returns, Market efficiency, Panel data.