A Case Study about Determinants of Price-Earnings Ratio: Chemical Sector of Pakistan
Abstract: Price-to-Earnings (P/E) ratio, a relative valuation technique has always remained at the centre of attention of market analysts and investors ever since the origin of discounted dividend growth model of Gordon and Shapiro (1956). The present study attempts to identify the factors explaining variations in P/E ratio for chemical sector of Pakistan by using Ordinary Least Square (OLS) regression on pooled data of 25 firms listed at Karachi stock exchange for the period 2005 to 2009. Furthermore, taking into account the volatility in Pakistani stock market during the study period, a time-series analysis has also made by using OLS regression model to examine whether determinants of P/E ratio differ across years or not.
Introduction: Considerable research has focused on analyzing the stock market performance using different financial ratios for example Price-to-Earnings (P/E) ratio, Price-toSales ratio, Price-to-Dividend ratio and Book-to-Market ratio (Bodie et el., 2005). However, researchers, market analysts, fund managers and investors mostly rely on Price-to-Earnings ratio for analyzing relative attractiveness of equity investments and use it as a valuation technique for performance evaluation of individual stocks, sectors and markets (Molodovsky 1953). P/E ratio, measured as dividing stock price by earnings per share, alternatively known as “Price Earnings Multiples”, indicates how much investors are willing to pay for each rupee of firm’s earnings.
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