Company fundamentals as determinants of firm-level equity premiums: Evidence from an emerging economy

Equity premium is a vital number to consider in finance when making fund allocations and investment decisions. This study explores the relationship between (controllable) determinants of firm-level equity premiums in the context of the Pakistan stock market. It uses a sample of 306 firms? annual data, from January 2001 to December 2015, using a two-stage least-squares method to estimate our panel data model (Wooldridge 2005; Arellano 2016). During the selected sample period, the average market premium of the Pakistan stock exchange (100 Index) was 20%. The average equity premium of individual firms was only 8%. Company fundamentals are considered determinants of firm-level equity premiums. Panel data econometrics techniques were used to estimate the modified version of the multi-factor model for the Pakistan Stock Exchange. It is found that the market premium, return on equity, dividend payout ratio, accounts receivable and firm size significantly and positively affect the firm-level equity premium. However, increase in the debt-to-equity and quick ratio negatively affect that premium. The company fundamental variables are controllable for the firms and can be improved by company management to encourage investors and maximize shareholder wealth.

Cross-Sectional PEG Ratios, Market Equity Premium, and Macroeconomic Activity

This article explores the information content of PEG ratios (price/earnings to growth ratios) for future aggregate returns and economic fundamentals. We first establish an analytic link between PEG ratios and time-varying expected returns of stocks. We then combine the link with empirical asset pricing models to extract market-wide information from cross-sectional PEG ratios. The resultant cross-section estimates of the risk premiums on stock betas serve as proxies for market-wide information. The proxies contain salient information about future market equity premiums and macroeconomic activity both in-sample and out-of-sample. Moreover, the proxies outperform aggregate PEG ratios and the cross-section beta-premium estimate based on conventional valuation ratios and retain incremental power in forecasting future market equity premiums. The results are robust to using various econometric methods for standard error adjustments.

PERSISTENT CATASTROPHIC SHOCKS AND EQUITY PREMIUMS: A NOTE

This note demonstrates analytically that a persistent catastrophic shock on endowment growth, even if moderate, yields negative equity premiums when a representative agent is relatively prudent. In particular, it derives the minimum persistence necessary to have zero equity premiums.