The Relationship between Fundamental Variables and Stock Returns in the Oil and Gas Companies of Pakistan

Abstract

This paper investigates the relationship between annual stock returns, book to market ratio, dividend yield ratio and price to earnings ratio. A sample of twelve oil and gas sector companies listed on the Pakistan Stock Exchange (PSX) were selected. The annual average values for the suggested variables from 2008 to 2017 were obtained and calculated. The panel data regression method using random effect model was applied. The result of the paper show that only book to market ratio has positive correlation and has a significant impact on the stock returns and has the ability to predict future returns for investors. While, the other ratios, like, dividend yields, price to earnings ratio have a positive correlation but insignificant impact on the stock returns. Findings of this study suggest that investors can use and apply the investment criteria that utilizes book to market ratio to earn returns on their investment and minimize the risk on the investments.

The Role of Financial Attributes of Profitable Firms on Stock Performance in Pakistan

“…The regression model, which assumes relationship amid dependent and independent variables, is starting point for econometric analysis. The research econometric model is mentioned below, (Zaheri & Barkhordary 2015;Muhammad & Ali 2018;Khalid et al, 2019;Faisal et al, 2022). Panel data has been used for econometric analysis.…”

“…Both variables represent a firm's risk and have an inverse relationship with the firm's returns, while on other side, they represent earnings for creditors, where, these variables have a positive relationship with firm's returns. Size variable one hand, size is associated with firms risk and future growth opportunity (Franco et al, 2008;Yosef et al, 2010;Khalid et al, 2019;Faisal et al, 2022) and on the other -side it explains that smaller firms have more riskier securities than larger firms (Francis et al, 2005;Yosef et al, 2010;Khalid et al, 2019 andFaisal et al, 2022). Profitability and financial risk attributes have equivocal relationship.…”

“…Also, B/M and P/E ratios represent "shareholders maximisation of wealth". However, B/M also represents the firm's strength for the relevance of the accounting information (Franco et al, 2008;Francis et al, 2005;Huddart et al, 2006;Huddart et al, (2003Huddart et al, ( , 2006Chaudhry et al, 2018;Khalid et al, 2019;and Faisal et al, 2022).…”

“…Fama and French (2021), and Yang et al (2017) came to the conclusion that stock return is simply characterized by two elements: size and book / market ratio. Maroney discovered that a high B/M ratio led to a larger return (Maroney, 1997;Yosef et al, 2010;Khalid et al, 2019;Faisal, 2022). Lam concluded that firm business size, book/market ratio, and inverse P/E ratio may explain the disparity in stock returns in Hong Kong (Lam, 2002) while Yosef et al (2010) used this to remove auto correlation.…”

“…According to Ashiq Ali et al (2003) the B/M ratio can forecast future returns. Umar (2008) did a study titled "Fundamental analysis of Saudi emerging market stock returns 1990-2004" and discovered a link between yearly stock returns and the B/M ratio and inverse E/P ratios.Book value has linear relation with p/e relation and vice versa (Basu, 1987;1997;Yosef et al, 2010;Khalid et al, 2019;Khalid et al, 2022;Faisal et al, 2022). This research investigates to what degree profitable firm equity transaction are partial by respective firm financial information to common stockholders with in stock market.Overall, the findings of empirical research studies indicated that there is considerable association between the desired average stock return and characteristics such as any firm's size, BM value ratio, and earnings-to-price ratio (Chan et al, 2007;Basu 1983).…”