Net Stock Issue Effect on Karachi Stock Exchange

Abstract

Asset pricing models have been source of interest since many years with respect to their efficiency in predicting asset returns. CAPM is among first such models which provided a coherent framework to this question, and is still been treated as a puzzle. Ever since its presentation, a number of researchers have tried to test it and over the years it has been demonstrated through empirical evidence that there are a number of factors outside its framework, which are also significantly contributing towards returns estimation. This study aim to test the CAPM model in light of one such factor i.e. Net Stock Issue, which empirically has been demonstrated to result in low returns. We are using KSE all index data with 904 firms from July 1993 to June 2010. The data for variables have been taken from Thomson Reuters DataStream with monthly returns, number of shares outstanding (NOSH) and market values of each firm. We have further constructed pentile portfolios on the basis of Net Stock Issue and subsequently computed equally weighted and value weighted returns of these portfolios. Using Generalized Method of Moments (GMM) we have tested these portfolio returns for significant difference from CAPM based returns. We have been able to demonstrate that the Net Stock Issue is not a significant predictor of assets returns and CAPM has also been found to be not explaining the returns pattern in KSE.