Abstract

Study investigates the relationship between stockholders’ return, real growth rate and inflation using return on equity as measure of shareholders’ return. Annual data on intended variables for non-financial companies listed on Karachi Stock Exchange has been collected from 1966 to 2010(44 years). Taking a macroeconomic perspective, study uses aggregate data rather than data for individual firms. Autoregressive Distributive Lag is used to study the relationship. Results revealed that inflation has no relationship with shareholder’ return in both long run and short run, while real growth shows significantly positive association with shareholder’s return. We concluded on basis of our analysis that inflation has no direct relationship with shareholders’ return. Thus, investment in stocks is not an effective hedge against inflation. Study has implications for investors who should invest in stocks by analyzing the real economic activity of the economy rather than inflation. Although, the data was huge enough to study this relationship, we feel that a better statistical approach to study this relationship can provide further insights.

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