The Effect of Price Limits on Value Premium: Evidence from Pakistan Equity Market

Abstract

The purpose of this study is twofold. The first is to examine the effect of price limits on the stock returns of all manufacturing firms listed on the Pakistan Stock Exchange. The second is to explore the role of price limits in determining the value premium. The study used the Fama-Macbeth cross-sectional regression by taking data for 2000-2020. The results show that stocks with high price limit frequency have substantial value premiums, consistent with the limit-to-arbitrage hypothesis's prediction. Further, a strong relationship exists between price limit and stock returns, resulting in an earnings per share anomaly. Price limits as circuit breakers are helpful for security and exchange commissions to set a price limit based on market volatility and halt trading from a giant price swing. This study also adds to the asset pricing literature by considering the value premium for the Pakistani equity market. The originality lies in its pioneering investigation within a developing economy, contributing unique insights to asset pricing dynamics.

          Keywords: price limits, value premium, investor attention, limits-to-arbitrage, information uncertainty