Capital Assets Pricing on KSE-Pakistan and Fundamental Values : An Analysis of FCF and EPS

This study is conducted to test the impact of two fundamental values (FCF & EPS), depicted through financial reports, on security prices. Sample includes all nonfinancial firms listed in KSE-30 Index and covers 9 years period 2000-08. Valuation of securities done through discounting of free cash flows and impact on security prices variation is calculated by regressing FCFE & EPS with market price. Findings suggest that on KSE investors give relatively higher (62%) weightage to EPS and very low (9%) to FCFE. These findings are very surprising to the author as accrued income has gained more weight in the eyes of investors than free cash flows while making investment decision. It could be due to any of the following reasons. First companies' cash flows are lacking patterns and huge variations exist. Second irrational behavior of investors and noise traders; and finally dominance of speculative activities in the market. Another aspect of these findings may be higher degree confidence of investors in financial reports