MACROECONOMICS AND FIRM-LEVEL DETERMINANTS OF MARKET TO BOOK RATIO: EVIDENCE FROM PAKISTAN TEXTILE INDUSTRY

Abstract

This research aims at assessing the determinants of the M/B ratio of eighty textile firms in Pakistan collected from 2011 to 2020, giving a total of 800 observations. Specifically, conforming to a theoretical base and employing four empirical strategies, including Ordinary Least Squares (OLS), Fixed Effect (FE), Random Effect (RE), the study identifies both firm and macroeconomic factors influencing the M/B ratio. Further, the findings establish that there is an inflation regime which is positively and significantly associated with the M/B ratio; systematic risk (beta) has a positive influence on the M/B ratio; interest rates have a negative influence on the M/B and 
leverage also appears to have a negative effect on the M/B. On the other hand, we do not have evidence that firm growth proxied by GDP, firm age and profitability having any impact on market valuation, Thus as is evident firm specific and macroeconomic factors may not impact firm’s market valuation in the same way. This study highlights the significance of applying panel data regression analysis in establishing the changes over time and cross-sectional ones when analyzing the M/B ratio. This research contributes information and insights to investors, managers and policymakers about the state of value investing and ways in which strategies for valuing equities 
should be better suited in relation to macroeconomic factors and firm characteristics. Therefore, this work extends the knowledge of firm valuation in emerging markets especially the textile industry by questioning dominant theories that assume firms focus on profits and maturity.