Table of Contents

Abstract........................................................................................................................
List of Abbreviations........................................................................................................
Chapter 1.......................................................................................................................
Introduction....................................................................................................................
1

Background.............................................................................................................

1.2

Problem Identification.............................................................................................

1.3

Problem Statement..................................................................................................

1.4

Research Questions.................................................................................................

1.5

Objectives of the Study............................................................................................

1.6

Significance of the Study..........................................................................................

1.7

Definition of Variables...........................................................................................

1.7.1

Dependent variable:.............................................................................................

1.7.2

Share price........................................................................................................

1.7.3

Independent Variables:.......................................................................................

1.7.4

Leverage........................................................................................................

1.7.5

Profitability.....................................................................................................

1.7.6

Liquidity.........................................................................................................

1.7.7

Payout Ratio....................................................................................................

1.7.8

Stocks Valuation...............................................................................................

1.8

Planning of the study.............................................................................................

Chapter 2.....................................................................................................................
Literature Review..........................................................................................................
2.1

Share Price...................................................................................................

2.2

Leverage......................................................................................................

2.3

Profitability..................................................................................................

2.4

Liquidity......................................................................................................

2.5

Dividend Payout Ratio.....................................................................................

2.6

Stocks Valuation............................................................................................

Chapter 3.....................................................................................................................
Research Methodology....................................................................................................
1

3.1

Population..........................................................................................................

3.2

Sample and Sampling Technique..............................................................................

3.3

Type of Research..................................................................................................

3.4

Data Collection....................................................................................................

3.5

Theoretical Framework..........................................................................................

3.6

Hypotheses.........................................................................................................

3.7

Analysis Tools.....................................................................................................

3.8

Data Description..................................................................................................

3.8.1

Debt to Equity Ratio.......................................................................................

3.8.2

Return on Assets............................................................................................

3.8.3

Current Ratio................................................................................................

3.8.5

Dividend Payout Ratio.....................................................................................

3.8.4

Price earnings Ratio........................................................................................

Chapter 4.....................................................................................................................
Data Analysis and Interpretation........................................................................................
4.1

Table.................................................................................................................

4.2

Table.................................................................................................................

4.3

Table.................................................................................................................

4.4

Table.................................................................................................................

4.5

Table.................................................................................................................

Chapter 5.....................................................................................................................
Discussion...................................................................................................................
5.1

Limitations of Study.............................................................................................

Conclusion...................................................................................................................
5.2

Recommendations................................................................................................

References...................................................................................................................
Annexure 1..................................................................................................................

Abstract
Prime objective of this study is to determine those variables that explain share prices of
oil and gas sector of Pakistan. Investment in equity share is one of the most liquid forms
of investment. Market price of the share is one the most important factor which affects
investment decision of investors. A sample of twelve companies from Oil and Gas Sector
has been selected from Karachi Stock Exchange for the period from 2007 to 2012. Some
company specific variables were selected from previous studies to determine the share
prices. The share prices is taken as dependent variable while our independent variables
were Debt to Equity, Current Ratio, Price earnings ratio, Dividend per share and Return
on assets. Data has been collected from annual reports of companies and analyzed by
using Descriptive statics, Regression and correlation etc. The results revealed that Debt to
Equity, Current Ratio, Price earnings ratio, and Return on asset has significant impact on
the market price of share. Further, results of study indicated that return on assets
Dividend per share being the strongest determinants of market price comparatively, so the
results of the present study suggest companies to pay regular dividends and effectively
use assets of business to generate revenue.

Key Words: Share price, Leverage, Profitability, Payout Ratio, Liquidity and Stock
Valuation.

List of Abbreviations

Proxies
Leverage

Debt to Equity Ratio

(D/ER)

Profitability

Return on Asset

(ROA)

Liquidity

Current Ratio

(C/R)

Payout ratio

Dividend per share

(DPS)

Stock Valuation

Price Earnings Ratio

(PER)

Chapter 1
Introduction
1

Background

According to security Exchange Commission of Pakistan (SECP) report (2012). The

securities market division (SMD) of security Exchange Commission of Pakistan is
accountable for controlling, administering, and improving the stock market. It controls
primary and secondary markets with the aim of protective investors interest. Capital
market of Pakistan presently consists of 3 stock exchanges. Which are Karachi stock
Exchange, Lahore stock Exchange and Islamabad Stock Exchange.
Karachi stock Exchange Limited is that the biggest and most liquid stock market in
Pakistan. It was established on September 18, 1947 and incorporated on March 10, 1949.
Initially five companies were listed with a complete paid-up-Capital of thirty seven
million rupees. KSE initial index introduced was supported fifty companies known as
KSE fifty index. Initially buying and selling of shares used to be carried out on open outcry system. KSE a hundred Index was introduced on November 1, 1991. In 2002
computerized Trading system was introduced known as Automated Trading System with
a capability of one million trades per day and has ability to produce connectivity to an
infinite number of users as stated in KSE annual report (2012).
In any country, capital market is taken into account to be an awfully attractive field for
any investment. KSE provides a reliable, orderly, liquid and economical digitized market
place where investors meet on to get and sell listed companies' ordinary shares and
different securities. According to KSE website total 580 companies were listed as on
November 13, 2013 with total capitalization Rs. 5399.10 billions. The listing of
companies is completed by fulfilling the strict rules and laws of Securities

Exchange Commission of Pakistan (SECP) & Karachi stock Exchange Limited. Listed
companies are categorized in numerous main business sectors. There are total thirty six
sectors listed on Karachi stock Exchange and from these thirty two sectors contribute
towards the capitalization remaining four sectors are allotted for indexes, futures bonds
etc. Non capitalization sectors are Bonds, Future Contracts, Non Equity Instruments and
index number Future Contracts.
According to KSE annual report 2012 there are four varieties Indexes On November
1991, KSE-100 Index was introduced with a base worth of 1000 points. The KSE-100
index incorporates a hundred companies selected on the basis of sector illustration with
highest capitalization that capture over ninety percent of total capitalization of the
businesses listed on the stock market. From thirty six Sectors, thirty two companies are
included

i.e. one company from every sector on the basis of the most greater

capitalization (excluding the non market non capitalization

tributary sectors) and

remaining sixty eight corporations are included on the basis of largest capitalization in
descending order.
Economist and Investors have developed several variables, ratios and indicators that are
employed in predicting the share price of shares of companies. Stock Exchange gives
listed companies a path to increase capital to expand their businesses. Once an
organization has to raise their funds they sell shares of the company to the general public.
This is solely done by listing their shares on a stock market. Willing investors are able to
buy shares of public offerings the cash that is raised from the investors is employed by
company to expand operations, get another company or employ extra staff and increase to
their financial strength. All of this ends up in improve economic activity that helps to
drive the economy.
Stock market is an excellent image of economic process for any country. This is a place
where international and domestic investors invest their savings to maximize their wealth
by follow a correct channel. Capitalist will evaluate the worth of companies before
investment their cash weather that company or sector have potential to come up with
revenue. Pricing of shares in stock exchange is one of the fascinating and vital subject in

finance. The investors and stakeholders within the capital market have an interest in
understanding the factors that have an effect on the movement of share prices.
Investment in equity share is one in every of the foremost liquid styles of investment.
Market price of the share is one the foremost vital issue that affects investment decision
of investors (Sharma, 2011). There are two schools of thought when it comes to
investment analysis: Technical analysis and fundamental analysis. Technical Analysis is
the forecasting of future financial price movements based on an examination of past price
movements. Like weather forecasting, technical analysis does not result in absolute
predictions about the future. Instead, technical analysis can help investors anticipate what
is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts
that show price over time Fundamental analysis looks at the actual performance and
value of the stock by analyzing data from company financial statements through key
ratios. This helps investors determine which stocks are over or undervalued (Malik et al.,
2012). A company's financial performance is measured using a fundamental analysis.
This type of analysis makes use of data from financial statements, statistical reports and
accounting records to determine a company's worth and future potential value. Market
price of a stock tends to move towards its intrinsic value, which is the true value of a
company as calculated by its fundamentals. If the market value does not match the true
value of the company, there is an investment opportunity. The goal is to determine the
current worth and, more importantly, how the market values the stock. (Gill et al, 2012)
The stock price in the market is not static rather it changes every day. The most obvious
factors that influence are demand and supply factors. (Wilcox, 1984; Sharma and Singh,
2006; Sharma, 2011) suggest that share price changes are associated with changes in
fundamental variables that are relevant for share valuation like Book value per share,
Dividend coverage ratio, Dividend per share, Earnings per share (EPS), dividend payout
ratio, Price-earnings ratio (P/E), and firm size.
Understanding of the affect of various fundamental variables on share price is very much
helpful to various parties such as investors, management, government, etc., as it will help
them in taking various important decisions.

So, in the present study attempt has been made to study the impact of selected accounting
variables on the shares prices of companies included in oil & gas sector of KSE.

1.2

Problem Identification

Equity financing is very important for every firm that needs significant amount of
financial resources to run their business. Attracting and then retaining investors are the
goals of financial managers that can be achieved by providing them best returns on their
investment. The competition is becoming intense as more companies are entering in the
stock market. So it has become difficult to attract and retain potential investors.
Instability in stock prices makes the investor curious and dissatisfied with the investment
decision. Therefore understanding components that affect the stock prices are important
for the investors and financial managers of all firms. It is also very necessary to
understand the affect of various fundamental variables on the share prices.

1.3

Problem Statement

This study investigates the factors that affect the shares prices of companies included in
oil & gas sector of KSE. It also aims to find out the affect of various company specific
variables on shares prices of companies included in oil & gas sector of KSE.

1.4

Research Questions

The major aim is to explain:

1.5

Is there any relationship between these variables?

How fundamental variables influence stock prices of oil & gas sector?

Objectives of the Study

The current study is an attempt to find out the impact of fundamental variables on shares
prices of companies included in oil & gas sector of KSE.
This research aims to achieve following objectives:

Identify the determinants of shares prices.

To find out how different variables affect stock prices of oil & Gas sector.
To facilitate investor regarding investment in oil and gas sector.

1.6

Significance of the Study

Stock prices play a significant role for the organization and investors. A stock price of
any firm never remains constant. Fluctuations in stock prices are caused due to number of
factors and it is very necessary to know the reason of these fluctuations. There are
number of factors that can influence the stock prices. There is a need to understand that
stock prices are affected by many components. To assist financial managers, operating the
firms in Pakistan and potential investors it is important to develop understanding about
the change in stock prices. The research therefore attempts to find out the factors that are
causing change in stock prices, specifically the affect of various fundamental variables on
shares prices of companies included in oil & gas sector.

1.7

Definition of Variables

1.7.1

Dependent variable:

1.7.2

Share price

Investor word explains share price as:

The cost of purchasing a security on an exchange. Stock prices can be affected by a
number of things including volatility in the market, current economic conditions, and
popularity of the company.

1.7.3

Independent Variables:
1.7.4

Leverage

Investor word explains leverage as:

Leverage is a proxy used for Debt to Equity Ratio. Debt-to-Equity ratio is the ratio of
total liabilities of a business to its shareholders' equity. It is a leverage ratio and it
measures the degree to which the assets of the business are financed by the debts and the
shareholders' equity of a business.

1.7.5 Profitability
Investor word explains profitability as:

Profitability is a proxy used for Return on Assets. Return on assets is the ratio of annual
net income to average total assets of a business during a financial year. It measures
efficiency of the business in using its assets to generate net income. It is a profitability
ratio.

1.7.6 Liquidity
Investor word explains liquidly as:

Liquidity is a proxy used for Current Ratio. Current ratio is the ratio of current assets of a
business to its current liabilities. It is the most widely used test of liquidity of a business
and measures the ability of a business to repay its debts over the period of next 12
months.

1.7.7 Payout Ratio

Investor word explains payout Ratio as:

Payout Ratio is a proxy used for Dividend payout Ratio. Dividend payout ratio is the ratio
of dividend per share divided by earnings per share. It is a measure of how much earnings
a company is paying out to its shareholders as compared to how much it is retaining for
reinvestment.

10

1.7.8 Stocks Valuation

Investor word explains Stock Valuation as: Stocks Valuation could be a proxy used for
price Earnings ratio relation. Price/Earnings ratio relation is that the ratio relation of a
company's share price to its earnings per share. It tells whether or not the share price of
an organization is fairly valued, undervalued or overvalued.

1.8 Planning of the study

This study is organized as fallows. The second chapter is that the Literature Review. The
third chapter provides detail regarding data description and methodology fourth chapter
covers data analysis and discussion, fifth chapter is regarding the conclusion and
suggestions.

11

Chapter 2
Literature Review

The Review of literature in the concerned research area is of great importance in carrying
out further research work. The research works reviewed here have been sourced from
various journals, articles, etc.

2.1

Share Price

(Irfan & Nishat, 2002) Investigate that Dividend yield, leverage, payout ratio relation and
size of the firm are the factors to be assessed whereas creating investment choices by the
12

investors in Pakistan. (Ihsan & Hajra, 2007) They found that stock prices in Pakistan are
largely influenced by monetary and economic indicator like gross domestic product,
industrial production, Exchange rate, Trade deficit, openness, Inflation, and
capitalization. He illustrated the future relation between political economy variables and
stock prices. (Imran, 2010) Examined the causative relationship between macroeconomic indicators and KSE share prices in Pakistan. The results found no causative
relationship between political economy indicators and stock exchange prices in Pakistan.
(Sharma & Sanjeet, 2011) They investigate the empirical relationship between equity
share prices and company specific variables such as: dividend per share, earning per
share, price earnings ratio, dividend yield, and dividend payout, size of firms in terms of
sale and web value for the amount 1993-94 to 2008-09. He had chosen one hundred
fifteen firms as a sample for these study kind completely different sectors of India. The
results of study indicated that dividend per share and earnings per share are the strongest
determinants of market price. During this study monetary factors prove to be useful for
the capitalist for investment within the India.(Farhan & Malik, 2012) They investigate
that determining share prices is a complicated and clashing task. According to theory of
economics, price of any asset is usually determined by the market forces. In case of
shares prices, it appears by trading between the investors in stock markets. Major forces
functioning in this case include the firms key performance indicators (fundamentals),
market efficiency, investors approach, and some macroeconomic variables like GDP,
inflation and oil prices.
(Zahid & Ahmad, 2012) They explained that stock exchange play a crucial role within
the economy, within the sense that it mobilizes domestic resources and channels them to
effective investments. He determined the political economy factors that capture the stock
price movements in the Karachi stock exchange. Because of statistic information,
ARIMA model was practiced for the empirical estimation. The results indicated that
political economy variables, that is, inflation, rate of exchange and economic process
cause virtually eighty percent movements within the stock prices at KSE. (Yasir &
Muhammad, 2013) They investigated the result of size, dividend yield, plus growth, and
Return on asset on variable quantity share price and chosen sample of fifteen from KSE
for the amount of 2008-2011. He used fixed effect regression model. Result found that
13

size contains a positive important relationship with the share prices whereas the opposite
variables (Dividend yield, Return on assets) have insignificant relationship.

14

2.2

Leverage

(Arditti, 1967) This study finds a negative however statistically insignificant relation
between leverage and equity returns. (Joseph, 1968) This study describes that if the
corporate have higher leverage it rely on semi permanent creditors for its semi permanent
capital and semi permanent debt capital usually prices but the firm is in a position to earn
on its total capital. Study additional explains that the firm with the bigger proportion of
debt in its capitalization can earn the higher return on equity capital and better rate of
return on equity capital ought to turn out successively additional rising of earnings and
dividends and better valuation of the ordinary shares so the return on equity capital,
growth of earnings and dividends and also the market's valuation of the firm's ordinary
shares are all directly tied to the leverage. (Bhandari, 1988) The results investigate that
expected returns on common stocks are absolutely associated with the debt/equity
magnitude relation (DER), dominant for the beta and firm size. Solely producing
corporations were used.
(Marcia & Nickolaos, 1989) This study investigates the knowledge result caused by a
firm's amendment in pure capital structure via debt-for-equity and equity-for-debt
exchange offers. The proof suggests that the previous transactions result in abnormal
stock prices will increase and important positive abnormal returns for the firms
stockholders. Whereas the latter result in abnormal stock prices decreases and the firms
common stocks expertise important negative abnormal returns.

(Rong & Henderson, 1991) They explained that a firm's degree of total leverage
unremarkably is taken into account to be the merchandise of degrees of operative and
monetary leverage. Results examine relationship between stock-price risk and degree of
combined leverage is positive and statistically important. (Deborah & Robert, 1990) This
study describes the variety of facts regarding prices behavior around equity problems and
investigates that stock costs of issuing corporations on average exhibit a massive and
extended positive abnormal return previous to an equity issue. The stock prices drops
considerably upon the announcement of an equity issue.
15

(Lakshmi, 1991) This study examines the relation between the stock prices reaction to
the announcement of straight debt problems and measures of the protection risk. The
study describes those announcements of straight debt offerings are not related to a major
stock prices reaction.
(Merton, 1991) The study investigate that leverage is quantity of debt wont to finance a
firm's assets. A firm operative with additional debt than equity is taken into account to be
extremely leveraged. The study describes that Leverage, as a business term, refers to debt
or to the borrowing of funds to finance the acquisition of a company's assets and price of
the firm was independent of its capital structure. (Cheung & Lilian, 1992) This study
investigate that volatility of equity returns is negatively associated with the extent of
stock prices. This leverage effect is stronger for tiny, as compared to massive, firms.
Study additionally describes that the relation between stock prices dynamics and firm size
are stable, the strengths of the relationships seem to vary over time. (Juha & Teppo, 1997)
This study investigates the relation between stock returns and monetary leverage within
the stock exchange. The results indicate that the come leverage relation turned from
negative to positive once the degree of the corporations monetary leverage significantly
declined owing to the changes within the monetary atmosphere of Finnish corporations.

(Robert, 1999) In this study research investigating whether stock value is influenced by
how a firm changes its leverage ratio in relationship to its industry leverage ratio norm.
Study examines that firms which are away from industry debt-to-equity norms are
significantly more negative stock returns than returns of firms moving closer to debt-toequity norms. Study examines that finding is consistent with optimal capital structure
theory if industry debt-to-equity norms are reasonable approximation of

wealth-

maximizing leverage ratios. (Armen & Sheridan, 2001) This study investigates that stock
costs play a crucial role in determinative a firm's funding selection. Study examine
companies that have massive stock prices will increase are additional probably to issue
equity and retire debt than are corporations that have stock prices declines. The study
instructed that observation is in keeping with the thought that stock price will increase is
usually related to improved growth opportunities.
16

(Irfan &Nishat, 2002) They investigate that Dividend yield; leverage, payout ratio
relation and size of the firm are the monetary ratios to be assessed whereas creating
investment choices by the investors in Pakistan. (Patricia & James, 2005) This study
explains the leverage effect in UK stock returns by reference to the return volatility,
leverage and size characteristics of UK companies. Results examine that leverage effect
is found that is stronger for smaller companies and has greater explanatory power over
the returns of smaller companies. It explains that companies with high leverage ratios
should exhibit greater leverage effects. (Pegaret, Alex, & Christine, 2008) This study
explains that when a firm decides how to price its products or services this decision
affects not only the returns to the firm's owners, but also the firm's ability to service its
debt. Study describes that Pricing decisions thus involve trade-offs between the interests
of a firm's owners and its creditors. Results describes that highly levered firms approach
such trade-offs differently than do firms with low leverage. (Huang, 2009) This study
investigates daily stock exchange volatility in major Asian stock. Indices utilizing random
volatility models and analyzed the domestic and international leverage effects of major
Asian stock exchanges, together with the Japan, Asian country, and Taiwans stock
markets. This paper found that for the domestic leverage result, all of 3 markets examined
important responses to positive return shocks, however insignificant responses to
negative return shocks for the Japan and South Koreas stock markets. Results of this
study will facilitate investors to regulate and hedge their risks in international
investments, particularly in East Asian markets. (Nazir & Ahmed, 2010) This study
examines the relation between the Leverage and volatility within the stock costs in
Pakistan. A sample of seventy three corporations has been chosen from (KSE) indexed
(KSE-100) corporations for the amount of 2003-2008 and fixed effect result and random
effect models are applied on the panel information. The results found that the leverage
has negative and non-significant impact on stock price volatility. (Salehnejad & brave,
2010) They examines that result return on assets and return on equity and monetary
leverage on exchange listed firms by using multiple correlations. Study shows the results
that return on assets and return on equity stock listed companies on the exchange contains
a significant financial leverage ratio is not significant. (Panayiotis & Georgia, 2012) This
research investigates the relation between leverage and stock returns. This study
17

investigate that the market risk premium, the size, and also the momentum individual
factors had a positive and statistically important relationship with stock returns, whereas
the leverage and price risk factors had a negative and statistically significant relation
with equity returns.

2.3

Profitability

(AL Khalayleh, 2001) This study investigate the link between accounting performance
indicators and market performance indicators chosen a sample of forty Jordanian public
firms listed in national capital Security Exchange period from 1984 to 1996. Results
showed a major positive relationship between the market value per share with the ratios
of return on assets and return on equity. (AL Thaher, 2003) This study examined the
impact of dividend policy on market share prices. The study chosen sample of seven
Jordanian business banks listed in national capital Security Exchange throughout the
period from 1996 to 2000. Results showed a major positive relationship between the
market value per share with dividends. (Gallizo & Salvador, 2006) They examined the
link between stock prices and accounting variables. Their results indicate that firm size
and profitability is that the most relevant factor affecting stock prices. (Dimitropoulos &
Asteriou, 2009) They examined relation between the monetary ratios relation and stock
prices chosen the sample of one hundred and one firms listed within the Athens exchange
for a period of ten years. Study indicates that the variable accounting profitability is that
the most relevant variable that result the stock prices. (Dwi & Ratfink, 2009) They
examined result of economic Ratios, firm size, and income with the stock return. Study
chosen the sample of thirty-nine producing firms listed on Republic of Indonesia stock
exchange. Result shows that profitability, turnover and market magnitude relation has
significant impact to the stock return. (Salehnejad & brave, 2010) They examined the
result of rate of return on assets and return on equity and monetary leverage on stock
exchange listed firms by using multiple regressions. Results shows by testing hypotheses
rate of return on assets and return on equity stock listed firms on the exchange contains a
significant result. (Miri & Abrahimi, 2011) This research examined the link between
linear and nonlinear relationships metallic and non-metallic minerals trade stock prices in
18

national capital exchange throughout period from 2003 to 2009. Their results showed that
the linear and nonlinear relationships between monetary ratios and stock prices. (Hashemi
& Behzadfar, 2011) They evaluating the link between the knowledge content of accruals
and financial ratios of chosen listed firms on the exchange stock quotes analysis
hypotheses represent significant earnings per share, return on assets, net income on stock
prices. (Elizabeth & Siti, 2012) This research explained that dividend, profitability, priceearnings ratio relation and leverage, are attainable determinants of share prices. Results
showed positive relationship between share prices and profitability. Research worker
used completely different sectors from stock exchange in Asian nation named as Dhaka
stock exchange (DSE). The researchers have used panel information referring to 5 sectors
of DSE - Food and Allied, Fuel and Power, Engineering, prescription drugs and
Chemicals, and care sectors for the amount 2006-2010 and used totally changed standard
statistical method. (Majed & Said, 2012) This study examines the link between the ROA,
ROE and ROI ratios along and on an individual basis with Jordanian insurance public
firms share prices for the period (2002-2007). Results showed a positive relationship
between the ROA, ROE and ROI ratios in conjunction with Jordanian insurance public
firms share prices.

2.4

Liquidity

(Ohlson, 1980) This study explained that financial ratio relation analysis will facilitate
investors in creating investment call and predicting firms future performance. It also
describes that results of these financial ratios can also give early picture of firms
financial condition. (Sang, 1998) Stock market volatility is reduced and liquidity is rises.
These results counsel that information is one among the factors that affects share prices
volatility. If information is correct and quick, stock market volatility is reduced and also
the price discovery method will be additional economical. When the efficiency of data is
high, liquidity of stock markets will increase. (Dwi & Rahfiani, 2009) They examined the
accounting information in explaining stock return. The study uses liquidity, leverage, size
and cash flow as proxies of accounting information. Study chosen samples which
embody listed firms in producing industries that actively trading for a year 2003-2006 in
19

Republic of Indonesia stock exchange. The study finds that profitability, turnover and
market ratio relation has important impact to the stock return.(Kohansal & Amir, 2013)
Study examined relationship between monetary ratios and stock prices of firms listed on
the exchange of food. Study used information from the years 1992 to 2010. Monetary
variables together with liquidity ratios (current ratio), the ratio relation of activity (asset
turnover), the profitability (rate of return on assets and return on equity) and monetary
leverage (debt) and equity prices food stock. The results indicate that current magnitude
relation shows a positive and important response in periodically. Result indicate that
there's a positive and significant response by employing current ratio relation, return on
assets and return on equity rate better explains expected returns.

2.5

Dividend Payout Ratio

(Desai & Meghnad, 1965) This study examine that dividend per share is vital determinant
of market price. Results indicate that dividend per share has positive and important
impact on market value of share. (Srivastava, 1968) The study investigates the straight
forward linear relationship between share prices, dividends and retained earnings.
Results indicate that the co-efficient of dividend are important at five per cent and
retained earnings are not important in any respect. Results additionally indicate that
retained earnings have not any result on share prices however current dividends have a
powerful result. It examine that current dividends have a predominant influence on share
price. (Zahir & Khanna, 1982) They Studied the determinants of stock costs in India in
one hundred and one industries indifferent sector for the year 1976-77 and 1977-78 with
the assistance of multiple simple regression models. Dividend per share indicate a major
determinant of share price, yield indicate extremely important determinant with its
negative association with market value of share. (Ali & Chowdhury, 2010) They studied
empirical a part of this study employs an event study methodology to research the share
price reaction for dividend announcement. Out of twenty five listed sample banks within
the observation amount, market adjusted share price declines for eleven banks and no
changes for eight banks and statistical pooled t-test also reveals that stock worth reaction
to dividend announcement are not statistically significant. (Nazi & Ahmed, 2010) This
study investigates the role of company dividend policy in determinative the volatility

20

within the share prices in Pakistan. A sample of seventy three corporations has been
chosen from (KSE) indexed (KSE-100) corporations for the duration of 2003-2008 and
glued result and random result models are applied on the panel information. The results
found that payout ratio relation has important impact and relationship with the share price
volatility in KSE. (Neetu & Shuchi, 2010) This study examined that dividend is that the
price of equity capital to equity shareholders. The results indicate that dividend
announcement has an impression on the market value of the shares; the market can react
positively, if the dividend is up to the expectation level of the equity investors. On the
opposite hand if the dividend announcement is not the expectation level of the
shareholders, the market react negatively. (Elizabeth & Siti, 2012) They examined that
Shareholders receive dividend, on their shareholdings within the variety of returns is a
source of financial gain to them. Shareholders intention is to earn additional dividend,
and choose those companies that pay higher dividends. This need creates bigger demand
for higher dividend paying stocks that will increase the market value of such stocks. This
study use panel information and chosen 5 sectors minimum of nine corporations in
every sector of largest stock exchange as Dhaka Stock Exchange (DSE) duration 20062010 and used totally changed standard statistical method. The result found that the
variables dividend per share could be a important determinant of share price for all the
sectors. (Khan, 2012) Study investigates the result of the amendment within the dividends
on share price behavior. This study use sample includes of 4 firms from completely
different industries period from 2004 to 2009. The findings indicate that the stock costs
of all sample firms vary with the varying in dividends per share. (Kanwal, 2012) He
studied the impact of dividend announcements on share prices of chemical and
pharmaceutical trade of Pakistan. Sample of twenty 9 firms listed at KSE-100 Index are
taken from the amount of 2001 to 2010. Panel information approach is employed to
analyze the link between Dividend Policy and stock exchange price. The empirical
estimation supported the fixed and Random result Model shows the numerous positive
relations between dividend, Earnings per Share and share prices. (Irwin & Marshall,
2013) They found empirical findings indicate that, share price are associated with current
dividends and retained earnings, higher dividend payout is sometimes related to higher

21

price-earnings ratios. Results investigate that a dollar of dividends has fourfold the
typical impact on prices.

2.6

Stocks Valuation

.
(Will ford, 1931) This study investigate that price earnings ratio relation is vital consider
determinative whether or not to get the stocks of the company or not. Study indicate that
average of this ratios have significance in indicating the probable future drift of stock
price. (Molodovsky, 1953) This study explained that the ratio has gained huge quality for
evaluating individual stocks, sectors and stock markets as potential investments (Mc
Williams, 1966) This study explained the utility of the price-earnings ratio relation as an
analytical tool. Based mostly upon a sample of 390 stocks for period from 1953 to 1964,
the study shows that higher investment performance will be obtained from a portfolio
comprised of low price-earnings magnitude relation stocks as contrasted to portfolios
created of high price-earnings ratio in relation stocks. (Nicholson, 1960) This study
explained that P/E relation is wide used as a measure of relative stock valuation. P/E is a
indicator that indicates current mood of investors what quantity they are willing to pay
per unit of company earnings. Results indicate that low P/E ratio implies a decent
investment, whereas a comparatively high P/E ratio indicates a poor investment
prospect. (Basu , 1977) Study investigate that returns on portfolios of low P/E stocks are
higher on the average than returns on higher P/E stocks, even when adjusting for risk.
(Basu, 1977) Tested the claim that low P/E ratio corporations tend to outstrip those with a
high P/E ratio. His analysis enclosed over 1400 Industrial Companies. He fashioned
portfolios of low and high P/E ratios and determined their performance. Throughout the
twenty five years, the portfolios with low P/E ratios attained higher returns than the high
P/E securities. (Reilly, Griggs, & Wong, 1983) They examined a statistic relationship of
ratio by using multiple correlation models for quarterly normal & poor five hundred
information for a amount of 1963 to 1980. Results showed that P/E ratio changes with a
rise in dividend payout, completed earnings growth, and dividend growth. (David &
John, 1986) This study reveal results that portfolios comprised of low P/E securities
consistently attained abnormally high return whereas high P/E portfolios made
22

abnormally low rates of return. Results indicate portfolios containing small capitalization
corporations systematically provided positive abnormal returns over the identical time
horizon. (Ali Rahimi, 1995) Study investigates the link between ordinary shares and P/E
ratio of the businesses listed in TSE study examined the link between P/E ratio and stock
return. It additionally examined that stock with low P/E ratio throughout 1990-1994
obtained superior returns than stock with high P/E ratio. (Emadzadeh, Zarehi,&
Torvesian, 1999) He chosen a hundred stocks with the best return and found that all have
low P/E ratio. Then he chosen a hundred stocks with stocks of low return found that all
have high P/E ratio. (Al-Malay, Al-Mary, & Ayed, 2010) Examined the relationship
between P/E ratio, dividend yield, size and stock returns in Jordanian companies. The
result showed that there is long-term equilibrium between dividend yield, P/E ratio, size
and also the return on the stocks of Jordanian firms (Tze, Yantoultra, & Boon, 2010) The
study examined the stock exchange performance by considering P/E ratio relation.
Sample includes a hundred listed firms kind Malaysian stock exchange index, duration
from 1994 to 2010 Results emerges a good positive linear correlation between the
annualized return of Malaysian stock exchange index and P/E ratio. Results additionally
show that P/E ratio a helpful predictor of the performance of Malaysian stock exchange
index.

(Sanjay & Asheesh, 2010) This study investigates different price multiples for equity
valuation functions within the Indian context. Information is taken from a hundred forty
five massive firms that satisfy our screening criteria. The sample firms include thirteen
outstanding sectors, and also the study amount covers the years 19902007. Results
indicate that P/E ratio best price forecast than price to book ratio. (Chatterjee, 2011) He
examine the comparative ability of the 2 techniques particularly price-earnings P/E ratio
relation and price-to-book P/B ratio relation, in gaining higher equity returns in India.
The study chosen eighty firms listed in Bombay exchange for duration of eight years
from 2001 to 2008 identifies an inverse association between the P/E or P/B ratios and
stock returns, capitalist can receive systematically higher returns by investment the
correct stock having low P/E or P/B ratio relation. (Elizabeth & Siti, 2012) Study
23

investigate that there is a positive relationship between share price and price-earnings
ratio. He used panel information and chosen 5 sectors minimum of nine corporations in
every sector from national Dhaka Stock Exchange (DSE) duration from 2006-2010. The
result found that the variables P/E relation is a important determinant of share price for
all the sectors. (Vahid, 2012) This study examine the relation between P/E ratio and eight
monetary and economic variables together with: rate of interest, inflation, rate of growth,
systematic risk (), company size (market value), returns on equity, dividend yield and
debt to equity magnitude relation. Sample includes one hundred twenty listed firms in
national capital exchange (TSE) and amount from (2005-2011). The E-Views and Panel
information were used for information analysis. Study concludes that only price earnings
ratio is not only factor consider for investment. (Lan, 2012) The results of research
describe that PE ratio is useful in predicting long term returns but poor for subsequent
short turn horizons. Results also show that the PE ratio decrease, higher returns are
obtained. Sample includes ten industrial sectors including 54 observations of 153 stocks
and period from 1995 to 2004. (Talat & Samya, 2012) This study facilitates investor to
judge factors that describes variations in firms P/E ratio so as to draw in investors
attention and lift their confidence within the choice of companies like chemical sector of
Pakistan in their portfolios. (Rajib, 2013) He examine the determinants the share price of
stock exchange focusing solely on monetary sector of Asian nation like Bangladesh.
Monetary sector firms (Banks, Leasing and Insurance companies) of Dhaka stock
exchange (DSE). Sample of seventy two monetary firms were chosen amount kind 2005
to 2010. It is found from the analysis that Earning per Share (EPS) and P/E are
powerfully connected with share prices of firms in individual years. He concluded that
EPS and P/E ratio are determinative factors for price of shares in stock market.

2.7

Research Gap

After going through the literature review it is found that determining share prices is a
complex task. According to theory of economics, price of any asset is usually determined
by the market forces. Similarly in case of shares prices, it emerges by trading between the
investors in stock markets. Major forces working in this case include the firms key

24

performance indicators (fundamentals), market efficiency, investors perception, and

some macroeconomic variables (Farhan & Malik, 2012).
The review of studies revealed that many research studies have been conducted in this
area but Pakistani researcher have not selected oil and gas sector for research individually
only one research study is conducted related to individual sector. (Yasir & Muhammad,
2013) They viewed the determinants of change in share prices selected Banking sector
from Karachi stock Exchange in his research. This research study examines a large
number of Financial variables than those included in earlier research studies.

25

Chapter 3
Research Methodology

The section contains the details of the methodology used in the study. It contains
description of sample, development of hypothesis and the list of variables used in the
study and data sources in the proposed study.

The present study deals with fundamental analysis of share valuation as it focuses on
factors relating the company. In this study there are five independent variables and
proxies used to measure these variables. Leverage is measure through Debt to Equity
Ratio, liquidity is measure through current ratio, profitability is measure through
Return on Assets, payout Ratio is measure through Dividend per share and Stocks
Valuation is measure through Price earnings ratio and one dependent variable which is
share price.

3.1

Population

This study population is based on capital markets and fundamental variables which
influence the share prices. Capital markets include financial institutes and stock
exchanges like Islamabad Stock Exchange, Lahore Stock Exchange and Karachi
Stock Exchange.

3.2

Sample and Sampling Technique

A study is based on accounting data of companies included in the Oil &Gas Sector.
The companies used in our sample are listed in Karachi stock Exchange. Yearly last
month closing market prices for the period 2007 to 2012 were collected from the other
financial websites. These values were used to calculate the price Earnings Ratio and
Dividend payout Ratio.
26

3.3

Type of Research

This research based on quantitative study. Quantitative research is done in order to

identify the validity of hypothesis developed in the study by application of statistical
tools such as regression, descriptive Statistics, correlation for analysis.

3.4

Data Collection

Data is collected from secondary sources mainly form financial website and
Companies annual Reports for the period 2007 to 2012. The data includes Debt to
Equity Ratio, Current Ratio, Price Earnings Ratio, Dividend payout Ratio and Return
on Asset. We have taken the share price because of annual data because in annual data
share price variation is adjusted.

3.5

Theoretical Framework

In the theoretical framework the researcher highlighted the relationship between

independent variables and dependent variables. In this study the independent variables
are leverage, liquidity, profitability, payout ratio and price earnings ratio and
dependent variable share prices.
Independent Variables

Dependent Variable

Leverage
Profitability
Liquidity

Share Prices

Payout Ratio

Stocks Valuation

27

3.6

Hypotheses

This research is targeted investigating and testifying the impact of fundamental

variables on shares. The null and alternate hypotheses can be stated as fallow:
Hypothesis 1:
H1:

Leverage has significant impact on shares prices.

H0:

Leverage has insignificant impact on shares prices.

Hypothesis 2:
H2:

Profitability has significant impact on shares prices.

H0:

Profitability has insignificant impact on shares prices.

Hypothesis 3:
H3:

Liquidity has significant impact on shares prices.

H0:

Liquidity has insignificant impact on shares prices.

Hypothesis 4:
H4:

Payout Ratio has significant impact on shares prices.

H0:

Payout Ratio has insignificant impact on shares prices.

Hypothesis 5:
H5:

Stocks Valuation has significant impact on shares prices.

H0:

Stocks Valuation has insignificant impact on shares prices.

28

3.7

Analysis Tools

In our research study researcher used two statistical tools in order to find relationship
between Independent Variables include Leverage, Liquidity, Profitability, Payout
Ratio and Price Earnings Ratio dependent Variable i.e. Share Prices. These tools are
Descriptive statistic, Regression Analysis, Correlation Analysis.

3.8

Data Description

Researcher investigated the relationship between share prices and fundamental

variables. Fundamental variables that study used include Debt to Equity Ratio,
Current Ratio, Price Earnings Ratio, Dividend payout Ratio and Return on Assets.

3.8.1 Debt to Equity Ratio

Debt to Equity Ratio is also renowned as leverage ratio. Debt to Equity Ratio is used
to measure economic leverage of a particular business by splitting up its total
liabilities by shareholders equity. It shows and differentiate that what proportion of
equity and liability in its total shareholder equity and company is utilizing it to
investment its assets. The constituents of debt to equity ratio are internal capital
external capital and share holder equity of the firm. The external funds include debts
from the outsiders in the pattern of short-term loans, long-term borrowings and
debentures. It is very significant and key economic ratio and utilized as a benchmark
for assessing a firms financial power. The ratio is furthermore utilized to measure
firms ability to repay its financial obligations. While enquiring the financial strength
of a specific firm, it is significant to pay attention to the debt to equity ratio.

Debt Equity=

Total Debt
Shareholders Equity

29

3.8.2 Return on Assets

Return on assets (ROA) is a profitability ratio which is used to calculate the Return on
the assets engaged to develop funds and furthermore displays the percentage of profits
that a firm earning in relation to its total assets. It is a key earnings ability ratio
assesses the percentage of earnings made by a firm per rupee/dollar of its total assets.
This ratio gives a concept as to how efficiently administration of the firm utilizing its
assets to develop earnings. The number from this ratio devotes as concept to the
investors that how effectively the firm is earning relation to its assets. The present
ratio is an indication that how efficiently the firm is earning relative to its assets.
Returnon Assets=

Earning before Tax

Total Assets

3.8.3 Current Ratio

The current ratio is a financial ratio that measures whether or not a firm has enough
resources to pay its debts over the next 12 months. The current ratio is an indication
of a firm's market liquidity and ability to meet creditor's demands.
Current Ratio =

current assets
current libilities

3.8.5 Dividend Payout Ratio

Dividends per share are the amount of dividends that a publicly traded company buys
per share of common stock, to their shareholders over their prescribed time span. The
earnings of the company's net income, that which is not paid out as dividends, is
retained by the business for growth and is known as retained earnings. The percentage
of earnings used to pay out as dividends to investors and retained by the business is
called the dividend payout ratio.
Dividend Payout Ratio=

Dividend per share

Earnings per share

30

3.8.4 Price earnings Ratio

The price earnings ratio is one of the stock valuation ratios utilized in economic ratio
analysis. It is a very significant ratio for publicly traded enterprises because it notifies
investors how much they are giving per share (price) for each dollar of earnings (net
income) by the business. In other phrases, the price to earnings ratio displays how
much investor eager to pay for shares of stock of the business per dollar of described
earnings

Price Earnings Ratio=

current share price

Earnings per share

31

Chapter 4
Data Analysis and Interpretation
4.1

Table

Descriptive Statistics

Stock Prices

Leverage

profitability

Payout Stocks
Ratio
valuation

Liquidity

Mean

183.06

1.40

0.10

1.92

0.37

9.32

Median

159.6

1.43

0.07

1.34

0.37

6.78

Range

564.39

9.00

1.09

8.35

1.36

146.70

Minimum

4.66

-2.65

-0.32

0.39

-0.12

-30.20

Maximum

569.05

6.35

0.77

8.74

1.24

116.5

Skewness

0.816

0.54

0.91

2.10

0.36

3.59

Standard Dev

126.93

1.71

0.15

1.51

0.32

17.39

Standard Error

14.95

0.21

0.01

0.17

0.03

2.04

Sum

13181.03

101.05

7.39

138.56

27.03

671.46

Count

72

72

72

72

72

72

The table 4.1 exhibits the statistical descriptive. The yearly average of share price of
oil and gas sector is 183.069 with standard error of 14.95. The maximum stock price
32

of oil and gas companies like Attock Petroleum Limited is 569.05 in 2007 and
minimum stock price of Byco Petroleum Pakistan Limited is 4.66 in 2008. The yearly
average of leverage of oil and gas companies is 1.40 with standard error 0.2017. The
minimum leverage of oil and gas companies like Byco Petroleum Pakistan Limited is
-2.65 and maximum leverage of oil and gas like Pakistan State Oil Company Limited
is 6.350 in 2009.

The yearly average of profitability of oil and gas companies is 0.1027 with standard
error of 0.0179. Which shows that average company in oil and Gas sector earning
10% profit on their assets. The maximum profitability of oil and gas companies like
Pakistan Oilfields Limited is 0.770 or 77% and minimum profitability of Byco
Petroleum Pakistan Limited is 0.3267 or 32 % in 2009. The yearly average of
liquidity of oil and gas companies is 1.9245 with standard error of 0.1784. Which
shows that average company in Oil and Gas sector has 2 times current asset than
liabilities. The maximum liquidity of oil and gas companies like Oil and Gas
Development Company Limited is 8.74 times in 2012 and minimum liquidity of Byco
Petroleum Pakistan Limited is 0.39 times in 2007.

The yearly average of payout ratio of oil and gas companies is 0.3754 with standard
error of 0.0381. This means that average company in Oil and Gas sector is paying
37% profit to its shareholders. The maximum payout ratio in oil and gas Sector
Company like Shell Pakistan Limited is 1.240 in 2007 and minimum payout ratio in
Oil and gas Sector Company like Pakistan State Oil Company Limited is 0.1280 in
2009. The yearly average of stock valuation of oil and gas companies is 9.3258 with
standard error of 2.049. The maximum stock valuation of oil and gas companies like
Attock Petroleum Limited is 116.5 in 2007 and minimum stock valuation of Burshane
LPG (Pakistan) Limited is 30.206 in 2007.

4.2

Table

Correlation

33

Correlations(r)

Share Prices

Share Prices

Pearson Correlation

Leverage

Pearson Correlation

.242*

Profitability

Pearson Correlation

.326**

-.127

Liquidity

Pearson Correlation

.264*

-.250*

.715**

Payout Ratio

Pearson Correlation

.500**

-.138

.478**

.428**

Stock Valuation

Pearson Correlation

-.110

.101

.086

-.040

.091 1

*. Correlation is significant at the 0.05 level (2-tailed).

**. Correlation is significant at the 0.01 level (2-tailed).

In statistical analysis correlation is a technique used to explain the strength and

direction between two variables in the relationship. It is a measure used to identify the
relationship between the independent and the dependent variables. Its value ranges
from positive 1 to negative 1.

From the statistical data constituted in above table 4.2 it is evident that numeric value

34

of .24* shows a weak positive correlation between share price and leverage at 0.05
level of significance ( r=.24*,p=.05). Numeric value 0.326** show moderate positive
correlation between share price and profitability (r=.326**, p=.01). In case of share
price and payout ratio the numeric value of 0.50** shows that there exists a strong
positive correlation at 0.01 level of significance between both (r=.50**, p=.01).
Financial variable Liquidity and Stock valuation numeric value is .264* and -.110
respectively which shows that liquidity has weak correlation(r=.26, p=.05) and stock
valuation has inverse relation with share price (r=-.110, p=.35).

So it can be concluded from these numeric results that only financial variable
profitability and payout ratio have a comparatively strong relation with share price of
oil and gas sector.

4.3

Table

Anova

df

SS

MS

Significance F

Regressio
n

513629.403

102725.88

10.75

1.38E-07

Residual

66

630394.721

9551.4352

Total

71

1144024.12

ANOVA table shows the goodness of fit. It report whether the model is fit or not. In
table 4.4 indicates that F test is 10.759 which are greater than critical value of 2. And
significance level is 0.000 which is also less than Tested significance level of 0.05.
The results show that there is statistically significant relationship among independent
variables such as stock valuation, Liquidity, Leverage, Payout ratio, Profitability and
dependent variable i-e Share prices of Oil and Gas companies collectively and these
35

explanatory variables are statistically significant in explaining the price of market

share.
4.4

Table

Model Summary

Regression Statistics
Multiple R

0.67005

R Square

0.448967

Adjusted R Square

0.407222

Standard Error

97.73144

Observations

72

The table 4.3 explains the regression analysis; the results show that The R is .670, the
relationship of independent variables like stock valuation, Liquidity, Leverage, Payout
ratio; Profitability has occurred positively impact on Stock price of oil and gas
companies. The R square value is 0.44 which indicate 44% variation in the market
share price is explained by these Leverage, Profitability, Liquidity, Payout ratio and
Price Earnings Ratio.

4.5
Table
Coefficients

Intercept

Coefficients

Standard Error

t Stat

P-value

110.316

26.370

4.183

8.66E-05

36

Leverage

22.522

7.0600

3.190

0.0021

profitability

300.250

114.526

2.621

0.0108

Liquidity

26.740

11.456

2.334

0.0226

Payout Ratio

206.615

41.423

4.987

4.70E-06

Stocks Valuation

-1.695

0.681

-2.488

0.0153

The Regression coefficient table 4.5 explains that which independent variable is
influenced to share price of oil and gas companies individually.

Hypothesis 1: Leverage has significantly affects the share prices of oil and gas
sector.

This hypothesis was developed due to the reason that a positive influence was felt on
the share price of oil and gas sector. This means that if the business manages the ratio
of debt and equity in a best way it will generate revenue which will affect the share
prices.

It is found through data analysis that T test of leverage is 3.191 and significance level
is less than 0.05 so there is statistically significant relationship with share price. The
results of regression coefficient justify that the null hypothesis of these independent
variables are rejected in the favor of alternative hypothesis that this variable such as
leverage has statistically significant relationship with share price of oil and gas
companies in KSE.

37

Hypothesis 2: Profitability has significantly affects the share prices of oil and gas
sector.

This hypothesis was developed due to the reason that a positive influence was felt on
the share price of oil and gas sector. This means that how firm using its assets
effective to generate revenue this figure affects the share prices both in a positive and
negative way.

It is found through data analysis that T test of profitability is 2.622 which are greater
than 2 and significance level is less than 0.05 so there is statistically significant
relationship with share price. The results of regression coefficient justify that the null
hypothesis of this independent variables are rejected and in the favor of alternative
hypothesis that this variable such as profitability has statistically significant
relationship with share price of oil and gas companies in KSE.

Hypothesis 3: Liquidity has significantly affects the share prices of oil and gas
sector.

This hypothesis was developed due to the reason that a positive influence was felt on
the share price of oil and gas sector. This means that how much business has ability to
repay its debt this ratio affects the share prices.

It is found through data analysis that T test of liquidity is 2.335 which are greater than
2 and significance level is less than 0.05 so there is statistically significant
38

relationship with share price. The results of regression coefficient justify that the null
hypothesis of this independent variables is rejected and in the favor of alternative
hypothesis hypothesis that this variable such as liquidity has statistically significant
relationship with share price of oil and gas companies in KSE.

Hypothesis 4: Payout ratio has significantly affects the share prices of oil and gas
sector.

This hypothesis was developed due to the reason that a positive influence was felt on
the share price of oil and gas sector. This means that how much earnings business is
paying out to its shareholders and how much it is retaining for reinvestment.

It is found through data analysis that T test of payout ratio is 4.988 which are greater
than 2 and significance level is less than 0.05 so there is statistically significant
relationship with share price. The results of regression coefficient justify that the null
hypothesis of these independent variables are rejected in the favor of alternative
hypothesis. Hypothesis that this variable such as payout ratio has statistically
significant relationship with share price of oil and gas companies in KSE.

Hypothesis5: Stock valuation has significantly affects the share prices of oil and
gas sector.

39

This hypothesis was developed due to the reason that a positive influence was felt on
the share price of oil and gas sector. Which indicate current mood of investor what
quantity they are willing to pay per unit of company earnings.

It is found through data analysis that T test of stock valuation is -2.489 which is
greater than 2 and significance level is less than 0.05 so there is statistically
significant relationship with share price. The results of regression coefficient justify
that the null hypothesis of these independent variables are rejected in the favor of
alternative hypothesis that this variable such as stock valuation has statistically
significant relationship with share price of oil and gas companies in KSE.

Intercept defines as the unexplained variations (Error term) that are due to some other
external causes instead of these variables. The beta coefficient explains that if
Leverage will increase by one unit share price will change with 22.52 units, if the
Profitability will change by one unit share price will change with 300.26 units, if the
one unit change occur in liquidity share price will change with 26.75 units, if the
Payout ratio will increase by one unit a change 206.62 units occur in share price, if the
stock valuation will increase by one unit the share price will change with -1.69 in a
negative way.

40

Chapter 5
Conclusions and Recommendations

5.1

Discussion

Table 1 summarizes the descriptive details for five variables affecting share price of
12 companies of Oil and Gas sector in KSE. Share price range from 4.66 to 569.05
with highest mean value equal to 183.06 and highest standard deviation 126.93.
Second controlled variable of Leverage, it ranges from -2.65 to 6.35 with mean
value1.40 and standard deviation 1.71, third variable is profitability which ranges
from minimum value -.32 to maximum .77 with a lowest mean value .102 and
standard deviation .15, fourth variables is Liquidity it ranges from .39 to 8.74 with a
mean value 1.92 and standard deviation 1.51, fifth variable is payout ratio it ranges
from -.12 to 1.24 with a mean value .37 and standard deviation .32, sixth and last
variable is Stock valuation it ranges from -30.20 to 116.5 with a mean value 9.32 and
standard deviation 17.39.Mean value provides the idea about central tendency of the
values of a variable. Standard deviation and the extreme values (minimum in
comparison to maximum) give the idea about the dispersion of the values of a variable
from its mean value.
Hypotheses have been estimated after review of literature. We estimated that leverage,
profitability, liquidity, Payout ratio and price earnings ratio has significant impact on
share prices. According to (Merton, 1991) Investigate that leverage is amount of debt
used to finance a firm's assets. A firm operating with more debt than equity is
considered to be highly leveraged. The study describes that Leverage, as a business
term, refers to debt or to the borrowing of funds to finance the purchase of a
company's assets. (Joseph, 1968) Describes that if the company have higher leverage
it depend on long-term creditors for its long-term capital and Long-term debt capital
generally costs less than the firm is able to earn on its total capital. Study further
explains that the firm with the greater proportion of debt in its capitalization will earn
a higher return on equity capital and higher rate of return on equity capital should
produce in turn more rapid growth of earnings and dividends and higher valuation of
the common stock therefore the return on equity capital, growth of earnings and
41

dividends and the market's valuation of the firm's common stock are all directly tied
to the leverage. (Patricia & James, 2005) explains that leverage effect in UK stock
returns by reference to the return volatility, leverage and size characteristics of UK
companies. Results examine that leverage effect is found that is stronger for smaller
companies. It explains that companies with high leverage ratios should exhibit greater
leverage and significant effects.
Profitability ratios are an indicator for the firm's overall efficiency. (Salehnejad &
brave, 2010) Study examined the effect of rate of return on assets and return on equity
and financial leverage on Stock Exchange listed companies by employing multiple
regression. Results shows by testing hypotheses rate of return on assets and return on
equity stock listed companies on the Stock Exchange has a significant effect.
(Dimitropoulos & Asteriou, 2009) This study examines relation between the financial
ratio and stock prices selected the sample of 101 companies listed in the Athens Stock
Exchange for a period of 10 years. Study indicates that the variable accounting
profitability is the most relevant variable which affects the stock prices. (Elizabeth &
Siti, 2012) This study explained that dividend, profitability, price-earnings ratio and
leverage, are possible determinants of share prices Results showed positive
relationship between share prices and profitability.
(Kohansal & Amir, 2013) Study examined relationship between financial ratios and
stock prices of companies listed on the Stock Exchange of food. Study used data from
the years 1992 to 2010. Financial variables including liquidity ratios (current ratio),
the ratio of activity (asset turnover), the profitability (rate of return on assets and
return on equity) and financial leverage (debt) and equity prices food stock Study
examined the effects of financial ratios used in food industry stock prices. The results
indicate that current ratio show a positive and significant response in periodically.
Result indicates that there is a positive and significant response by using current ratio,
return on assets and return on equity rate. (Desai & Meghnad, 1965) This study
examine that dividend per share is important determinant of market prices. Results
indicate that dividend per share has positive and significant impact on market price of
share. (Nazir & Ahmed, 2010) The study investigates the role of corporate dividend
policy in determining the volatility in the stock prices in Pakistan. A sample of 73
firms has been selected from Karachi Stock Exchange (KSE) indexed (KSE-100)

42

firms for the period of 2003-2008. The results found that payout ratio has significant
impact and relationship with the stock price volatility in KSE.
(David & John, 1986) Study reveal results that portfolios comprised of low P/E
securities systematically earned abnormally high returns whereas high P/E portfolios
produced abnormally low rates of return. Results indicate portfolios containing small
capitalization firms consistently provided positive abnormal returns over the identical
time horizon. The P/E ratio indicates as the only statistically significant factor.
(Chatterjee , 2011) The study examine the comparative ability of the two techniques
namely price-earnings ratio and price-to-book ratio, in gaining higher equity
returns in India. The study selected 80 companies listed in Bombay Stock Exchange
for a period of 8 years from 2001 to 2008 and identifies an inverse association
between the benchmark ratios and the equity returns in India, there is an inverse
relation between the P/E or P/B ratios and stock returns, and an investor can achieve
consistently higher returns by investing the right stock having low P/E or P/B ratio.
F test is 10.759 which are greater than critical value of 2. And significance level is
0.000 which is also less than Tested significance level of 0.05. The results show that
there is statistically significant relationship among independent variables and
dependent variable.
In correlation results indicate that Leverage has weak positive relationship with Stock
price. Profitability has moderate positive relationship with share price of Oil and gas
sector. Liquidity has negligible positive relationship with stock prices. Payout ratio
has strong positive relationship with share prices and Stock valuation has inverse
relation with stock prices. R-square explains that 44% of variation in share prices is
explained by variation in Leverage, Profitability, Liquidity, Payout ratio and Price
earnings ratio whereas the remaining 56% variation in share prices is caused by
variation in other variables which is not included in our study. Based on above results
we accepted hypotheses.

5.2

Conclusion

The present study has been undertaken to determine that which company specific
variables determine the share price of stock market. Company specific variables were
selected from previous studies such as: leverage, Profitability, Liquidity, Payout ratio
43

and price earnings ratio for the period 2007 to 2012. The results revealed that
Leverage, Profitability, liquidity and Price earnings ratio has significant impact on the
market price of share. Further, results of study indicated that return on assets and
Payout ratio being the strongest determinants of market price comparatively, so the
results of the present study suggest companies to pay regular dividends and
effectively use the assets to generate revenue. This policy will affect market price of
share in positive direction.

So the results of the study suggested that investor should not only consider only the
company specific variable for investment purpose because there are many other factor
affecting the share price. According to (Al-Tamim, 2007) Identified company
fundamental factors (performance of the company, a change in board of directors,
appointment of new management, and the creation of new assets, dividends,
earnings), and external factors ( government rules and regulations, inflation, and other
economic conditions, investor behavior, market conditions, competition, uncontrolled
natural or environmental circumstances) as influencers of share prices. In this research
R-square is .44 which explains that 44% of variation in share prices is explained by
variation in Leverage, Profitability, Liquidity, Payout ratio and Price earnings ratio
whereas the remaining 56% variation in share prices is caused by variation in other
variables which is not included in our study.

5.3

Limitations of Study

There are a few limitations of the study which are as fallows

It is only limited to Oil &Gas sector of KSE.

Data has been taken from annual report of companies.
Data is limited to six years.
Financial variables have been used.

44

5.4

Recommendations

In order to further improve the study we can take the following measures

Other company specific variables and macroeconomic variables should be

tested in order to identify which other variables impact the share prices.
The time horizon can be increased to further validate the findings.
In the end however it is suggested that the share prices alone should not be taken as a

means to evaluate any company and decisions.

Investor can use these factors in deciding their investment strategies and for the
evaluation of stocks.

45

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Annexure 1
Current Ratio
Current ratio is the ratio of current assets of a business to its current liabilities. It is the
most widely used test of liquidity of a business and measures the ability of a business
to repay its debts over the period of next 12 months.
Current Assets
A balance sheet account that represents the value of all assets that are reasonably
expected to be converted into cash within one year in the normal course of business.
Current assets include cash, accounts receivable, inventory, marketable securities,
prepaid expenses and other liquid assets that can be readily converted to cash
Current Liabilities
A company's debts or obligations that is due within one year. Current liabilities
appear on the company's balance sheet and include short term debt, accounts payable,
accrued liabilities and other debts.
Debt-to-Equity Ratio
Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders'
equity. It is a leverage ratio and it measures the degree to which the assets of the
business are financed by the debts and the shareholders' equity of a business.
Total Liabilities

53

The aggregate of all debts an individual or company is liable for. Total liabilities can
be easily calculated by summing all of one's short-term and long-term liabilities,
along with any off balance sheet liabilities which corporations may incur. On the
balance sheet, total liabilities plus equity must equal total assets.
Shareholders' Equity
A firm's total assets minus its total liabilities. Equivalently, it is share capital plus
retained earnings minus treasury shares. Shareholders' equity represents the amount
by which a company is financed through common and preferred shares.

Also known as "share capital", "net worth" or "stockholders' equity".

Dividend Payout Ratio
Dividend payout ratio is the ratio of dividend per share divided by earnings per share.
It is a measure of how much earnings a company is paying out to its shareholders as
compared to how much it is retaining for reinvestment.
Dividend per Share
The sum of declared dividends for every ordinary share issued. Dividend per share
(DPS) is the total dividends paid out over an entire year (including interim dividends
but not including special dividends) divided by the number of outstanding ordinary
shares issued.
Price/Earnings (P/E) Ratio
Price/Earnings or P/E ratio is the ratio of a company's share price to its earnings per
share. It tells whether the share price of a company is fairly valued, undervalued or
overvalued.
Current Share Price

54

The "real time" price of a security trading on an exchange, as well as the most recent
price of a security listed in an investment portfolio. Current price also refers to the
present price of a stock, currency, commodity, stamps or a precious metal.

Return on Assets (ROA) Ratio

Return on assets is the ratio of annual net income to average total assets of a business
during a financial year. It measures efficiency of the business in using its assets to
generate net income. It is a profitability ratio.
Annual Net Income
A company's total earnings (or profit). Net income is calculated by taking revenues
and adjusting for the cost of doing business, depreciation, interest, taxes and other
expenses. This number is found on a company's income statement and is an important
measure of how profitable the company is over a period of time.
Average Total Assets
The sum of current and long-term assets owned by a person, company, or other entity.
In business, total assets consist of all assets of a company. An asset is defined in
business as any items of ownership convertible into cash. Examples of assets include
cash, notes and accounts receivable, securities, inventories, goodwill, fixtures,
machinery, real estate and the like. All assets, and the total cash value of the total
assets, are reported on the company's balance sheet
Share Price
The cost of purchasing a security on an exchange. Stock prices can be affected by a
number of things including volatility in the market, current economic conditions, and
popularity of the company.

55

Share
A unit of ownership interest in a corporation or financial asset. While owning shares
in a business does not mean that the shareholder has direct control over the business's
day-to-day operations, being a shareholder does entitle the possessor to an equal
distribution in any profits, if any are declared in the form of dividends

Oil and Gas

(Number of companies in sector 12)

Symbol

Company Name

O.S. Shares

Registrar

Attock Petroleum Limited

82,944,000

THK Associates

1) APL

(Pvt.) Limited
2) ATRL

Attock Refinery Limited

85,293,000

THK Associates
(Pvt.) Limited

3) BPL

Burshane LPG (Pakistan) Limited 22,639,992

THK Associates
(Pvt.) Limited

4) BYCO

Byco Petroleum Pakistan Limited 977,858,737

FAMCO Associates
(Pvt.) Limited

5) MARI

Mari

Petroleum

Company 91,875,000

Limited
6) NRL

National Refinery Limited

Corplink (Pvt.)
Limited

79,966,560

Noble Computer
56

Services (Pvt.)
Limited
7) OGDC

Oil

and

Gas

Development 4,300,928,40 Noble Computer

Company Limited

Services (Pvt.)
Limited

8) POL

Pakistan Oilfields Limited

236,545,920

9) PPL

Pakistan Petroleum Limited

1,971,714,01 FAMCO Associates

10) PRL

Pakistan Refinery Limited

(Pvt.) Limited

35,000,000

FAMCO Associates
(Pvt.) Limited

11) PSO

Pakistan

State

Oil

Company 246,987,217

Limited
12) SHEL

Shell Pakistan Limited

THK Associates
(Pvt.) Limited

85,609,864

FAMCO Associates

57