How Cash Flow News and Discount Rate News Impact the Unexpected Stock Returns of Energy Firms of Pakistan

Kausar, Rabia and Qayyum, Abdul (2018): How Cash Flow News and Discount Rate News Impact the Unexpected Stock Returns of Energy Firms of Pakistan.

Abstract

This study has used the model of Volunteeno (2000). The objective of this study is to analyse the impact of the cash flow news and discount rate news on stock returns of energy firms of Pakistan from 2000 to 2015. We used the balanced panel data technique. Estimated the random effect model after employing the Hausman Test. The results of this research show that only discount rate news is significance and positively related with unexpected stock return returns of energy firms which describe that increase in variability in the discount rate news increase the variability in unexpected stock returns. As cash flow news is insignificance which conclude that there is no permanent effect occur in the unexpected stock return due to change in book value and earning. Moreover these firms are large; it’s also concluded that large firms are not affected by the cash flow news

• Item Type: MPRA Paper
• Language: English
• Keywords: Cash Flow News; Discount Rate News; Unexpected Stock Returns; Energy Firms of Pakistan, Balance Panel Data
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G0 - General

References

Abdul. G. K. (2014) The relationship of capital structure decisions with firm performance: A study of the engineering sector of Pakistan International, Journal of Accounting and Financial Reporting , 2: 1,2162-3082.

Ahmed, E., and J. B. Rosser Jr (1995) Nonlinear speculative bubbles in the Pakistani stock market, Pakistan Development Review, 34:1,25:41.

Balestra, P., and Nerlove, M. (1966). Pooling cross section and time series data in the estimation of a dynamic model: The demand for natural gas. Econometrica: Journal of the Econometric Society, 585-612.

Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of financial economics, 9(1), 3-18.

Bondt, W. F. and Thaler, R. (1985). Does the stock market overreact?. The Journal of finance, 40(3), 793-805.

Botshekan, M., Kraeussl, R., and Lucas, A. (2012). Cash Flow and Discount Rate Risk in Up and Down Markets: What Is Actually Priced? The Journal of Financial and Quantitative Analysis, 47(6), 1279-1301.

Callen, J. and D. Segal. (2004) Do Accruals Drive Firm-Level Stock Returns? A Variance Decomposition Analysis. Journal of Accounting Research, 42:527-60.

Campbell, John Y and John Ammer. (1993) What moves the stock and bond markets? A variance decomposition for long-term asset returns, Journal of Finance 48, 3-37.

Campbell, John Y and Robert J. Shiller (1988b) Stock prices, earnings, and expected dividends Journal of Finance 43, 661-676.

Campbell, John Y and Robert J. Shiller. (1988a) The dividend-price ratio and expectations of future dividends and discount factors, Review of Financial Studies 1, 195-228.

Campbell, John Y and T. Vuolteenaho. (2004) Bad Beta, Good Beta. American Economic Review 94:1249-75.

Campbell, John Y, (1991) A variance decomposition for stock returns, Economic Journal, 101, 157-179.

Celiker , U. Kayacetin , V. Kumar, R. and Sonaer, G. (2016) Cash Flow News, Discount Rate News, and Momentum, Journal of Banking and Finance, 0378-4266(16)30135-2.

Chen, Long, Zhi Da, and Xinlei Zhao. (2013). What Drives Stock Price Movements? ,Review of Financial Studies 26 :4, 841–76.

Cohen, R. B., Gompers, P. A. and Vuolteenaho, T., (2002.)Who underreacts to cash-flow news? Evidence from trading between individuals and institutions. Journal of financial Economics, 66:2, 409-462.

Eisdorfer, A. (2007). The Importance of Cash‐Flow News for Financially Distressed Firms. Financial Management, 36(3), 33-48.

Fama, E., and Kenneth. F (1988) Permanent and temporary components of stock prices, Journal of Political Economy,96, 246-273.

Fama, E. F (1965) Random Walks in Security Prices, Financial Analysts Journal 41:55–59.

Fauzia and Attiya (2009) Relationship between Stock Return, Trading Volume and Volatility: Evidence from Pakistani Stock Market, Asia Pacific Journal of Finance and Banking Research, 3: 3.

Garrett, I., and Priestley, R. (2012). Dividend Growth, Cash Flow, and Discount Rate News. Journal of Financial and Quantitative Analysis, 47(5), 1003-1028. doi:10.1017/S0022109012000427

Haugen, R. A., and Baker, N. L. (1996). Commonality in the determinants of expected stock returns. Journal of Financial Economics, 41(3), 401-439.

Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 1251-1271.

Hoch, I. (1962). Estimation of production function parameters combining time-series and cross-section data.Econometrica: Journal of the Econometric Society, 34-53.

Hsiao, C. (2014). Analysis of panel data (No. 54). Cambridge university press.

Jegadeesh, N., and Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of finance, 48(1), 65-91.

Jiang, Xiaoquan, Bong-Soo Lee.(2007) Stock Returns, Dividend Yield and Book-to-Market Ratio: A Log Linear Cointegration Model, Journal of Banking and Finance,31: 2, 455- 475.

Khan, et al. (2012) Impact Of Interest Rate, Exchange Rate And Inflation On Stock Returns Of Kse 100 Index, International Journal of Economics and Resreach, 142:155, 2229-6158.

Kuh, E. (1959). The validity of cross-sectionally estimated behavior equations in time series applications. Econometrica: Journal of the Econometric Society, 197-214.

Lazarsfeld, P. F. (1940). " Panel" Studies. The Public Opinion Quarterly, 4(1), 122-128.

Lazarsfeld, P., and Fiske, M. (1938). The “panel” as a new tool for measuring opinion.Public Opinion Quarterly, 2(4), 596-612.

Lin, Y. M., Hsu, Y. S., and Chen, S. L. (2009). Cash-flow news, market liquidity and liquidity risk. Applied Economics, 41(9), 1137-1156.

Marsh, Terry A. and Merton, Robert C.1986 "Dividend Variability and Variance Bounds Tests for the Rationality of Stock Market Prices," American Economic Review, 76, 483-98.

Muhammad Akbar, S. A. (2012) The relationship of stock prices and macroeconomic variables revised: Evidence from Karachi stock exchange

Muhammad, A. H. and Nida. S. (2013) Investigating Day-of-the-Week Effect in Stock Returns: Evidence from Karachi Stock Exchange – Pakistan, Pakistan Journal of Commerce and Social Sciences , 7:2, 381-393

Muhammad, T. S. (2012) Stock Market Reaction to Good and Bad Political News, Asian Journal of Finance & Accounting, 4: 1,1946-052.

Muhammad. S. (2014) Macroeconomic Variables & Its Impact on KSE-100 Index Universal Journal of Accounting and Finance, 2:2, 33-39.

Muhammad.T., and Shahwali. K (2015) Impact Of Political And Catastrophic Events On Stock Returns, VFAST Transactions on Education and Social Sciences, 6:1,2309-3951.

Mundlak, Y. (1961). Empirical production function free of management bias.Journal of Farm Economics, 43(1), 44-56.

Nishat, M. and R. Shaheen (2004) Macroeconomic factors and Pakistani equity market. The Pakistan Development Review, 43:4, pp. 619-637.

Rabia. A., and Adnan. B. (2015) International Impact of Oil and Gas Prices on Stock Returns: Evidence from Pakistan’s Energy Intensive Industries, Review of Social Sciences,3 :4.

Rafaqet. Ali, and Muhammad, A. (2012) Impact of global financial crisis on stock markets: Evidence from Pakistan and India, Journal of Business Management and Economics, 3:7. 275-282.

Rosenberg, B., Reid, K., and Lanstein, R. (1985).Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9-16.

Safi Ullah.K., and Faisal. R. (2008) Trading Volume and Stock Returns: Evidence from Pakistan’s Stock Market, International Review of Business Research Papers. 4 :2,151-162

Shahzadi. H., and Chohan, M. N (2012) Impact of Gold Prices on Stock Exchange: A Case Study of Pakistan, Working paper series, Karachi Stock Exchange, 10 :2, 1-14.

Sohail. N. and Zakir. H. (2009) Long-run and short-run relationship between macroeconomic variables and stock prices in Pakistan the case of Lahore stock exchange. Pakistan Economic and Social Review, 47: 183-198.

Vuolteenaho, T. (2002) What drives firm-level stock returns?, The Journal of Finance, 57:1, 233–264.

Wallace, T. D., and Hussain, A. (1969). The use of error components models in combining cross section with time series data. Econometrica: Journal of the Econometric Society, 55-72.