Studying the Behavior of Growth and Value Stocks in Pakistan Through Portfolios

Abstract

This research is basically focused on finding evidence for the dynamic behavior of  value and growth stocks over a timeline. The study also focuses on the convergence of these two categories because of the mean reversion pattern in their profitability and expected returns. The purpose of this research is to find evidence from the Pakistani stock market that Price to Book ratios of growth and stock prices follow a mean reversion pattern. Over pricing of growth stocks and under-pricing of value stocks take place which is followed by a correction and thus resulting in higher returns for value stocks and their PB ratio increases. While the price to book ratios of growth stocks decrease because of lower than expected returns. So this study tries to find an empirical evidence for this phenomenon. The population for this study consists of all listed companies in Karachi Stock Exchange (KSE) which remain listed from 2004 to 2008.The sample size was 94 companies. This research uses arithmetic means for trend
analysis and extreme values disturb the arithmetic means and consequently the
analysis. Secondary data have been used for this research. As mentioned above, the data of 96 companies useful in finding price to book ratios like book value of equity, number of fully paid ordinary shares outstanding and weekly market share prices have been used from 2004 to 2008. Other data has been extracted from the financial statements of companies while weekly share prices have been collected from Karachi Stock Exchange data websites. The data have been used for the period 2004-08. The results of the model (1) showed that there is a positive and significant relationship between “our growth portfolio†and “market growth portfolioâ€, while the results of model (2) showed that there is positive significant impact of “market value portfolio†on “our value portfolioâ€.