This paper is an attempt to examine the short and long run relationship among share prices,dividends and retained earning in Pakistan economy.The time-series econometric techniques are applied to the annual data for the period 1970 to 2006.An important feature of our analysis is the use of tests for unit roots and Johansen cointegration and ECM.Johansen cointegration has a number of advantages over the traditional approaches of causality.Certain characteristics of the Pakistani experience suggest that there is a stable long run relationship.Radical changes in dividends and retained earning have significantly affected the movement in the share prices.Financial liberalization and reforms started in early 1990s,as part of economic reforms has a very strong net effect on the share prices.It means that stock market is too much sensitive and volatile to financial liberalization in emerging economies.We find that a long-run relationship exists among share prices (SP),dividends (DIV) and retained earning (RE).
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