Abstract

This paper investigates the effects on shareholders’ wealth of firms composed of the Karachi Stock Exchange 100 index, around events leading up to the signing of the China-Pakistan Economic Corridor (CPEC) agreement. We used standard event study methodology to measure the stock price reaction of KSE 100 Index (composed of all major sectors of Pakistan economy) around three key events related to CPEC agreement. Based on average security returns and cumulative average security returns, our results show significant and positive reaction of KSE 100 Index around all three key CPEC events. Our results capture market participants’ assessment of the CPEC agreement’s impact on future growth of Pakistani companies and the resultant effect of its shareholders’ wealth. These positive wealth effects are of significant predictive value as additional bilateral and multilateral agreements are contemplated in that region. Our research contributes to a research stream that sees valuable payoffs of bilateral trade agreements for developing economies and support the argument that bilateral agreements can promote and attract institutional and private foreign direct investment (FDI), which otherwise may not be forthcoming. The argument goes on to argue that these bilateral agreements also help raise the quality of institutional framework in the developing countries.

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