INVESTIGATING THE RELATIONSHIP BETWEEN STOCK RETURNS AND MARKET CAPITALIZATION

Authors

  • Dr. Muhammad Farhan Assistant Professor PN School of Logistics, Karachi, Pakistan
  • Prof. Dr. Gobind M. Herani Rector, Denning Institute of Technology and Entrepreneurship Karachi, Pakistan
  • Dr. Lata R. Lohana Assistant Professor Indus University, Karachi, Pakistan

Keywords:

Small and Medium-Sized Enterprises, PSX, Firm Size, Market Structure

Abstract

This paper investigates the profitability of investing in small and medium-sized companies in Pakistan's stock market. Recent studies have found a significant impact of firms' size on stock market price. This study investigates the effect of firm size on companies listed on the Pakistan Stock Exchange, as the price of small-cap stocks should represent the firm's profitability. Stock performance in January and July plays a key role in the relationship between firm size and stock price appreciation. The study uses Thomson Reuters DataStream data, first released in January 2007, and gives investors access to previously inaccessible market data. This data includes monthly updates on the closing prices of business stocks, the value of the KSE-100 indexes, and the size of the Market. Under the Panel data techniques, a fixed-effects model is used to investigate the relationship. The findings of this paper suggest a link between company size and stock performance. The study finds the negative impact of the size of a firm on Stock Market Performance in the Pakistani stock market. This suggests that investors place a higher value on small-cap enterprises. The study found comparable results in many previous studies. The main contribution of this paper is to provide an understanding of how firm size affects stock in Pakistan's stock market. Unlike previous studies, rather than analyzing each company individually, the study uses aggregate monthly data on excess stock returns from more than 300 to grasp the size premium precisely.

References

Ahmad, M.M., Qureshi, S.A., Bilal, M., Naveed, and Rana, A.M. (2021). Dynamic Measuring the Impacts of Financial Fragility on the Performance of Non-Financial Firms Listed at the Pakistan Stock Exchange. International Transaction Journal of Engineering, Management, & Applied Sciences & Technologies, 12(1), 1–10. https://tuengr.com/A12/12A1/12A1M.html [Accessed February 15, 2023].

Ahmad, U., Husnain, M.I. ul, Khan, D.A., and Sulman, A. (2019). Impact of Corporate Social Responsibility on Financial Performance of Non-Financial Firms: Evidence from Pakistan Stock Exchange. Pakistan Journal of Social Sciences, 39(3), 1083–1090. http://pjss.bzu.edu.pk/index.php/pjss/article/

view/732 [Accessed February 15, 2023].

Al-Matari, E.M., Al-Swidi, A.K., and Fadzil, F.H.B. (2014). The Measurements of Firm Performance's Dimensions. Asian Journal of Finance & Accounting, 6(1), 24.

Anandarajan, A., Francis, B., Hasan, I., and John, K. (2010). Value relevance of banks: global evidence. Review of Quantitative Finance and Accounting, 36(1), 33–55.

Arif, U., and Tayyab Sohail, M.T. (2020). Asset Pricing with Higher Co-Moments and Cvar: Evidence from Pakistan Stock Exchange. International Journal of Economics and Financial Issues, 10(5), 243–255.

Baele, L., De Jonghe, O., and Vander Vennet, R. (2007). Does the stock market value bank diversification? Journal of Banking & Finance, 31(7), 1999–2023.

Bagh, T., Khan, M.A., Azad, T., Saddique, S., and Khan, M.A. (2017). The Corporate Social Responsibility and Firms' Financial Performance: Evidence from Financial Sector of Pakistan. International Journal of Economics and Financial Issues, 7(2), 301–308. https://dergipark.org.tr/en/pub/ijefi/issue

/32035/354484.

Bakhsh, A., Mahmood, Z., and Iqbal, M. (2019). Corporate Governance and its Impact on Triple Bottom Line: Evidence from Firms Listed with Pakistan Stock Exchange. Pakistan Journal of Social Sciences, 39(3), 771–784. http://pjss.bzu.edu.pk/index.php/pjss/article/view/702

Barakat, A. (2014). The Impact of Financial Structure, Financial Leverage and Profitability on Industrial Companies Shares Value (Applied Study on a Sample of Saudi Industrial Companies). Research Journal of Finance and Accounting, 5(1), 2222–2847. https://core.ac.uk/download/pdf/234629764

.pdf.

Bekkers, N., Doeswijk, R.Q., and Lam, T.W. (2009). Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes. The Journal of Wealth Management, 12(3), 61–77.

Blitz, D. (2012). Strategic Allocation to Premiums in the Equity Market. The Journal of Index Investing, 2(4), 42–49.

Dai, N. (2007). Does investor identity matter? An empirical examination of venture capital funds and hedge funds investments in PIPEs. Journal of Corporate Finance, 13(4), 538–563.

Dar, D.L., Naseem, A., and Rehman, R.U. (2011). Corporate Governance and Firm Performance: A Case Study of Pakistan Oil and Gas Companies Listed in Karachi Stock Exchange. Global Journal of Management and Business Research, 11(8), 1–9. https://journalofbusiness.org/index.php/GJMBR/article

/view/100115 [Accessed February 15, 2023].

De Jonghe, O. (2010). Back to the basics in banking? A micro-analysis of banking system stability. Journal of Financial Intermediation, 19(3), 387–417.

De Jonghe, O., Diepstraten, M., and Schepens, G. (2015). Banks' size, scope, and systemic risk: What role for conflicts of interest? Journal of Banking & Finance, 61(4), S3–S13.

Deng, S. (Esther), Elyasiani, E., and Mao, C.X. (2007). Diversification and the cost of debt of bank holding companies. Journal of Banking & Finance, 31(8), 2453–2473.

Elsas, R., Hackethal, A., and Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of Banking & Finance, 34(6), 1274–1287.

Gulamhussen, M.A., and Guerreiro, L. (2009). The influence of foreign equity and board membership on Portuguese banks' corporate strategy and internal cost management. Management Accounting Research, 20(1), 6–17.

Hassan, M.F., Hashim Bin Jusoh, Sajjad Khan, Fahad Ali Khan, Muhammad Naseem, and Imran Ali Khan (2021). Impact of Macro-Economic Variable on Pakistan Stock Exchange KSE-100 Index. The Journal of Management Theory and Practice (JMTP), 2(3), 17–23.

Hongming, X., Ahmed, B., Hussain, A., Rehman, A., Ullah, I., and Khan, F.U. (2020). Sustainability Reporting and Firm Performance: The Demonstration of Pakistani Firms. SAGE Open, 10(3), 215824402095318.

Huang, R., and Zhang, D. (2010). Managing Underwriters and the Marketing of Seasoned Equity Offerings. Journal of Financial and Quantitative Analysis, 46(1), 141–170.

Jamil, M.N., Rasheed, A., and Mukhtar, Z. (2022). Corporate Social Responsibility impacts sustainable organizational growth (firm performance): An empirical analysis of Pakistan stock exchange-listed firms. Journal of Environmental Science and Economics, 1(2), 25–29.

Jones, S. (2017). Corporate bankruptcy prediction: a high dimensional analysis. Review of Accounting Studies, 22(3), 1366–1422.

Karray, S.C., and Chichti, J. eddine (2013). Bank Size and Efficiency in Developing Countries: Intermediation Approach versus Value Added Approach and Impact of Non-Traditional Activities. Asian Economic and Financial Review, 3(5), 593–613. https://archive.aessweb.com/index.php/5002/article/view/

[Accessed February 15, 2023].

Khan, S., and Kamal, Y. (2022). A comprehensive dataset of the board of directors’ attributes of Pakistan stock exchange listed non-financial firms. Data in Brief, 41(3), 107879. doi:https://doi.org/10.1016/j.dib.2022.107879.

Krasnikov, A., Mishra, S., and Orozco, D. (2009). Evaluating the Financial Impact of Branding Using Trademarks: A Framework and Empirical Evidence. Journal of Marketing, 73(6), 154–166.

Lepetit, L., Nys, E., Rous, P., and Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking & Finance, 32(8), 1452–1467.

Mumtaz, A., Saeed, T., and Ramzan, M. (2018). Factors affecting investment decision-making in Pakistan stock exchange. International Journal of Financial Engineering, 05(04), 1850033.

Phan, D.H.B., Sharma, S.S., and Narayan, P.K. (2015). Stock return forecasting: Some new evidence. International Review of Financial Analysis, 40(2), 38–51.

Sawada, M. (2013). How does the stock market value bank diversification? Empirical evidence from Japanese banks. Pacific-Basin Finance Journal, 25(1), 40–61.

Scholtens, B. (2008). A note on the interaction between corporate social responsibility and financial performance. Ecological Economics, 68(1-2), 46–55.

Sherif, M. (2020). The Impact of the Coronavirus (COVID-19) Outbreak on Faith-Based Investments: An Original Analysis. Journal of Behavioral and Experimental Finance, 18(4), 100403.

Sufian, F., & Royfaizal Razali Chong (2009). Determinants of Bank Profitability in a Developing Economy: Empirical Evidence from the Philippines. AAMJAF, 4(2), 91–112. Retrieved from http://web.usm.my/journal/aamjaf/vol%204-2-2008/4-2-5.pdf.

Szegedi, K., Khan, Y., & Lentner, C. (2020). Corporate Social Responsibility and Financial Performance: Evidence from Pakistani Listed Banks. Sustainability, 12(10), 4080.

Yasir Khan, Muhammad Amjad, Dr. Saima Batool, & Obaid Ullah Bashir (2021). Corporate Governance Factors Drive Firms' Earning Per Share: Evidence from Pakistan Stock Exchange Listed Companies. Journal of Business & Tourism, 2(2), 123–132.

Downloads

Published

2023-12-31

How to Cite

Farhan, M., Herani, G. M., & Lohana, L. R. (2023). INVESTIGATING THE RELATIONSHIP BETWEEN STOCK RETURNS AND MARKET CAPITALIZATION. Journal of Research in Economics and Finance Management, 2(2), 45–59. Retrieved from https://journals.csrpublisher.com/index.php/JREFM/article/view/49