The Value-Growth Indicators and Value Premium: Evidence from Pakistan Stock Exchange
This paper aims to study the ability of the six value-growth indicators (i.e. gross profit to total assets, earning to price, book to market, dividend to price, cashflow to price and sales to price ratio) to generate value premium in Pakistan Stock Exchange. This paper uses the methodology of Dimson, Nagel, and Quigley (2003) to construct Fama and French factors. Using the data of daily stock returns from year 2001 to 2014 to form value weighted two dimensional portfolios, this study reports the existence of strong value premium for Pakistan equity market. Value premium is positive irrespective of the value-growth indicator used. Book to market ratio, although widely used in previous studies, generates lowest value premium (along with sales to price ratio). Additionally, gross profit to total assets when used as value-growth indicator can explain more variations in stock returns whereas, dividend to price ratio have lowest explanatory power of all the proxies used in this study