Determinants of Price to Earnings Ratio in Financial Sector of Pakistan Stock Exchange

Abstract

Price to earnings ratio a relative valuation technique has always remained at the center of attraction for market analysis and investors ever since the invention of discounted dividend growth model Garden and Shapiro (1956). The purpose of this paper is to examine the determinants of price to earnings ratio in financial sector of Pakistan Stock Exchange. This study is significant for investors, policy makers and research scholars especially in Pakistan Stock Exchange. By taking data of 100 financial firms this study applied Ordinary least square regression model under fixed effects to test the proposed hypothesis of study. It has been found out by the results of the study that factors such as leverage, firm size and return on assets significantly explain the price to earnings ratio of financial sector of Pakistan Stock Exchange whereas, exchange rate, inflation and dividend payout out ratio are unable to explain the price to earnings ratio of financial sector of Pakistan Stock Exchange. Overall the results of the study are helpful towards investors who can make better future investment decisions particularly when it comes to stock selection, fund allocation and portfolio strategies especially in financial sector of Pakistan Stock Exchange.