Sustainable Core Earnings & Stock Performance: An Evidence of the Pharmaceutical Sector of Pakistan

Abstract

This study furnishes a new measure of earnings quality that pertains to the sustainability of core-component & non-core components of earnings measured through firms’ and industry profitability benchmark and finds its impact on the stock performance in the context of the pharmaceutical sector of Pakistan. The study identifies twelve major determinants of sustainable earnings in the firms of the pharmaceutical sector of Pakistan that are mainly classified into core and non-core earnings and sub-classified into the firms’ and industry profitability benchmark and all three profitability measures (Gross Profit, Operating Profit & Net Profit). Based upon the core and non-core earnings components, the intensity of core earnings is measured and its impact on the stock performance is analyzed. For this purpose, a balanced panel data of 09 firms of the pharmaceutical sector that are listed in Pakistan stock exchange for 10 years i.e. 2010 to 2019 is used. The study employs two estimators: one, Random Effects Model for finding the determinants of sustainable earnings and its ability of sustainability and predictability, second, dynamic GMM model for measuring the impact of sustainable earnings on stock performance. This study affirms that the earnings of the firms operating in the pharmaceutical sector are sustainable; firms’ intensity of core earnings is a significant determinant of its profitability and industry intensity of core earnings is an insignificant determinant of firms’ profitability for the firms operating in the pharmaceutical sector of Pakistan. Lastly, the study did not find any significant impact of unexpected earnings on the stock’s performance on the firms. This study is of vital interest to investors, auditors, analysts, educational institutes, researchers and regulators.