Analysis on Impact of Macro-Economic and Returns on Shariah Compliant and Non-Compliant Portfolio: Evidence from the Capital Structure and Volatility of Pakistan Stock Market

Abstract

Pakistan stock exchange is one of the growing financial markets consisting Shariah compliant firms and Non-Shariah compliant firms. Shariah compliant stock has limited level of debt as compared to non-compliant stocks. Comparing both stocks can give a clear idea that how these differ in terms of the impact of return on asset and return on equity on capital structure and volatility as well as macro-economic variables. Capital structure can be affected by various factors and it can have a gross effect in crisis, volatility in financial markets during these crises can affect both firms and financial market. Macro-economic indicators are one of the true representation of country’s growth, stability, financial growth. These factors are also effecting financial markets in a whole furthermore low level of debt can reduce the risk of and can have a consistent performance. Panel Regression analysis was applied to study their effect on secondary data of both kind of stocks. The study concluded that macro-economic factors have an impact on both stocks except exchange rate because of local trading. Returns for shariah compliant were more positive and significant than compliant because of limitation of level of debt. Furthermore volatility and market return doesn’t have major impact directly on capital structure but in crises it seems to have large impact. Furthermore Volatility have positive and significant impact on return on equity and return on asset.

Keywords: volatility, capital structure, equity, debt, Pakistan Stock Exhange, Shariah compliant stock