The Relationship Between Fundamental Analysis and Stock Returns Based on the Panel Data Analysis; Evidence from Karachi Stock exchange (KSE)

Abstract

Fundamental analysis has gained huge popularity among capital markets researchers in last decades. It uses current and past financial reports (Piotroski 2000, 2004; Fama and French, 2004; Elleuch 2009, Seng 2012), along with political and economic data in order to assign intrinsic value to firms and help to identify mispriced securities (Kothari, 2001). Both fundamental and technical analyses are used to forecast stock returns with the aim to buy stock when they are under-priced and sell when they are overpriced.Our study aimed to investigate the ability of the historical accounting data in predicting future stock returns using fundamental analysis especially in emerging economy i.e. Pakistan. Data were collected for the eleven-year period from 2007 to 2017 for 115 non-financial companies listed on Karachi stock exchange (KSE) with available ten years consecutive data. This paper utilizes five indicators from multiple areas i.e. profitability ratios, liquidity ratios, leverage ratios, and market-based ratios. For analysis, this study used penal data analysis (common effect model, fixed effect model, and random effect model). The results indicates that the fundamental analysis can predict future stock returns in Pakistani listed companies and end up with the implications and future directions.

Keywords:  Fundamental analysis, Penal data analysis, emerging economy i.e. Pakistan,