Determination of Share Price: Evidence from Karachi Stock Exchange

Malik, Muhammad Farhan
Qureshi, Muhammad Usman
Azeem, Muhammad
Publication date: 
JEL codes: 
G10 - General, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill.
Share price determination is a contradictory task, affected by lots of factors. However some methods and techniques under different schools of thought have been developed for this purpose. Study reviews the important factors and philosophical developments on the subject. It discusses determination of share price using Ohlson(1995) model. Two forms of the model are employed; one is linear valuation model and second is the nonlinear product model. Latter uses the product of earnings and book value as third independent variable, in addition to traditional linear valuation model. Research employs book value per share (BVPS) and earnings per share (EPS) as used by several other authors. Empirical findings are based on the sample of fifty two companies from the Karachi Stock Exchange (KSE) drawn systematically on the basis of highest market capitalization. Eight years of 21st century (2002 to 2009) are chosen as study period.Statistical investigation using Fixed Effects Model (FEM) shows strong evidence for applicability of Ohlson model for KSE listed companies. It also shows that the published financial information is useful for shareholders, and fundamental analysis is pertinent with KSE to a larger extent. However product model of valuation has small improvement for valuation of companies. Adoption of more fair value accounting rules could increase this determination power.
Full text PDF file: