The Role of Acquisitions in FDI : Evidence from the Pakistan Stock Market

This paper aims to identify the relationship between FDI and stock market development and to observe its short and long run dynamics. Other variables like inflation, large scale manufacturing index and exchange rate are also included in the study in order to determine the most favorable variable for stock market development in Pakistan by using a time series data for the period 2001- 2015. The vector error correction model (VECM), cointegration analysis and multiple regression analysis are opted for as part of the methodology. The results show that foreign financial inflows have a positive and significant impact on stock market returns. Moreover, the relationship between inflation and stock market returns is also positive, while there is a negative relationship of exchange rate and large scale manufacturing index with stock market returns. It is, thus, recommended that policies that attract FDI should be pursued in order to improve stock market returns