Analysis of Stock Return Dependency on Company Performance And External Environment

Abstract

The share price of companies fluctuates with passage time due to the market current situation and information gathered by people interested in the firm’s future prospects. It is commonly known in the stock market that not all companies with strong profile provide good returns to the shareholders. There are other factors as well affect the share price of a company. Stock prices changes are most commonly triggered by the company performance and external environment. The reason behind this research is to analyze the stock return dependency on companies’ performance and the external environment in which it operates and identify the relationship of both internal and external factors with the stock return. The panel data of 459 non-financial companies listed on the stock exchange of Pakistan (PSX) is taken for the period 2002 to 2019. The internal factors used in this study which are commonly used for performance measurement are Earnings Per Share (EPS), Returns on Assets (ROA) and Returns on Assets (ROE). The external environment indicators used in this study are Inflation rate (INR), and Interest Rate (IR), and the Exchange Rate (ER). Control variables were also used in the study, which are Price Earning ration (PE), Book to Market Value (BM), Sale Growth (SG), Assets Growth (AG), Size and Leverage. Both the company performance and external environment are independent variable. The dependent variable is the share return of the company. The element determining company stock returns are determined using panel data regression with fixed and random effects. The results of regression reveals that Interest rate (IR), Returns on Assets (ROE)), Market Value (MV), Earning Per Share (EPS) and Sales Growth (SG1) have insignificant impact on the stock return. However their relation with stock return was noted positive. The relationship of Inflation Rate (INR), Exchange Rate (ER), Size, Asset Growth (AG1) and Book to market value (BM) was noted significant and negative. All other variables which include Return on Assets (ROA), Leverage, Price Earnings Ratio (PER) are influential and have positive impact on the stock returns. Since a result, the study advises current and future investors to evaluate these elements before trading or injecting cash into shares, as it is observed variation in share values as a result of those elements fluctuating