Purpose of the study: This study investigates the stock pricing of financially constrained (FC) firms in Pakistan for the period of 20 years (2000 to 2019). The researcher uses accounting information (financial ratios of the firms) to categorize Pakistani firms as the most and least financially constrained firms. Further, it examines how the Asset Pricing models perform with the risk-adjusted portfolio of the stock returns sorted based on financial constraints. Methodology: Using the financial constraint proxies/ leverage ratios (Total Debt to Market Value(TDMV), Total Debt to Common Equity (TDC), Interest Coverage Ratio (ICR) and the asset pricing models of Sharpe (1964), Lintner (1965), and the three-factor and the five-factor model of Fama and French (1993, 1996), the returns of all the non-financial firms listed in PSX were sorted as the most and the least financially constraint firms and then their risk-adjusted portfolios were analyzed through Excel, Eviews and STATA. Main Findings: Positive results (e.g. higher returns) are observed when the capital structure of the FC firms is heavy with debt as compared to unconstrained firms on Pakistan Stock Exchange (PSX). The time series outcome showed that risk-adjusted returns of most FC firms give an extra premium to investors in the PSX when the leverage ratios are used as proxies of financial constraints. Applications of the study: This study can be used to make an augmented model of asset pricing specifically for emerging and frontier markets by taking the FC factor as one of the main contributing risk factors to predict returns in the equity market. Novelty/Originality of the study: The devised methodology also results in a more refined and accurate quality of analyses and findings and more comprehensive and sound knowledge of asset pricing as compare to previously conducted studies in PSX.
For a country with a modest open economy like Pakistan, the significance of outlooks in determining inflation dynamic forces is investigated in this paper. For the years 1972 to 2014, the study examines the New Keynesian Phillips Curve (NKPC) in both conventional and hybrid variants. The output gap and labor income are two indicators of economic growth. The Dicky Fuller test are used to check for variable stationary, and the model's long-run parameters were determined using the generalized method of moments. The outcomes of the study demonstrate that the NKPC model appropriately describes inflation dynamics in Pakistan and is data-driven. The production gap was found to be an ineffective proxy for evaluating economic activity, although worker income shares appeared to be highly positive.
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