This study examines the impact of the quality of corporate governance, as measured by a specially constructed corporate governance index, on the expected cost of equity calculated using the capital asset pricing model (CAPM) approach. A total of 114 listed companies were investigated to analyze the relationship between the two variables for the period 2003 to 2007. The quality of corporate governance was measured by assigning weights to a set of related variables, although these variables were also considered individually. We used descriptive statistics, a correlation matrix, a simple ordinary least squares (OLS) approach, and fixed effect model to test the panel data collected. We found a negative relationship between managerial ownership and board size with the cost of equity, and a positive relationship between board independence, audit committee independence, and corporate governance with the cost of equity. These results could be due to the transition phase through which Pakistani companies are passing after the promulgation of the Code of Corporate Governance in 2002.
KEYWORDS: Corporate governance, cost of equity, Pakistan.
JEL: G30, G34.

Yunus, Muhammad with Alan Jolis, Banker to the Poor, The Story of Grameen Bank, Aurum Press Ltd, London, 1998, ISBN 978-1-85410-924-8, pp 313, Price: UK Pounds 8.99. It is the firm conviction of Muhammad Yunus, winner of the Nobel Peace Prize, that poverty can be eradicated and put away in museums once and for all. As the author puts it, the bottom line of his belief system is that ‘poverty does not belong in a civilized human society. It belongs in museums’. This is what motivated this stalwart to establish the Grameen Bank in Bangladesh, the pioneer in the field of micro-finance for the poor. Today, Grameen Bank can boast that it provides 2.5 billion dollars of micro-loans to over two million rural poor in the country.
KEYWORDS: Book review, Muhammad Yunus, Grameen Bank, microfinance, micro-finance.
JEL: N/A.

This study evaluates the ability of the Fama and French Three Factor model to explain a cross section of stock returns in the Karachi Stock Exchange (KSE). Following Fama and French factor approach, we sorted six portfolios by size and book to market. The sorted portfolios were constituted to represent stocks from each and every sector of KSE. Using Daily returns from January 2003 to December 2007, the excess returns for each portfolio were regressed on market, size and value factors. Our findings, in general, supported the notion of the three factor model. The three factor model was able to explain the variations in returns for most of the portfolios and the results remain robust when the sample was reduced to control for the size effect. Our findings are consistent with most of the studies that suggested the validity of the three factor model in emerging markets. These results warrant for the inclusion of size and value factors for valuation, capital budgeting and project appraisals, thus, having substantial implications for fund managers, analysts and investors.
KEYWORDS: Size Premium, Value Premium, Market Premium, Three-Factor Model.
JEL: G11, G12, G14.

This study attempts to discern the relationship between economic and financial development in Pakistan for the period 1973 - 2006. Vector error-correction modeling is used to identify the causality between economic and financial development and the exogeneity of the variable(s) in the model. These error correction terms have been derived from Johansen’s multivariate cointegrating procedure. Results indicate that, in the long run, economic development causes financial development. Furthermore, the real output variable is found to be exogenous. Thus, financial development is seen to be ineffective in terms of economic development determination in Pakistan.
KEYWORDS: Economic Development, Financial Development, Causality.
JEL: O16, C59.

This study seeks to determine the direction of causality between energy consumption (EC) and economic growth (EG), using annual data from 1971 to 2007. In our empirical analysis, we implement a bounds-testing approach to co-integration and an augmented form of the Granger causality test to identify the direction of the relationship between these variables both in the short and long run. Our findings suggest bidirectional causality between EG and EC in the short run; in the long run we find unidirectional causality from EG to EC. EC does not lead to EG in the long run because higher energy prices (oil prices) increase the cost of business, leading to a negative effect on EG. Additionally, when energy prices fluctuate, they create uncertainty that also affects economic growth. The study recommends direct investment in local energy resources.
KEYWORDS: Asset pricing, CAPM, financial literature, review.
JEL: N/A.

Trade is presumed to act as a catalyst to economic growth. This paper reinvestigates the export-led growth hypothesis in Pakistan by using annual time series data on exports, imports, terms of trade, and the labor force participation rate as explanatory variables and gross domestic product (GDP) as the dependent variable for the period 1971-2005. The study uses the more comprehensive and recent bounds test or autoregressive distributed lag model (ARDL) proposed by Pesaran et al (2001) to examine the existence of short-run and long-run relationships between exports and economic growth, which is crucial in designing policy to enhance trade-related potential in Pakistan. The results indicate that exports, labor force, and imports have a positive effect on growth, while the terms of trade has a negative effect. The proxy for trade liberalization has a positive impact on economic growth. Finally, the chief finding of this study is that the hypothesis of export-led growth in the Pakistan economy is supported in both the short and long run. Economic growth in Pakistan is accompanied by fluctuations in exports and imports both in the short and long run, but the labor force participation rate has a negative effect only in the short run. The terms of trade has the same effect in the short and long run.
KEYWORDS:
JEL: C - Mathematical and Quantitative Methods, F - International Economics.

The aim of this study is to examine the relationship between intellectual capital efficiency and the firm's profitability. The importance of intellectual capital (IC) and the related philosophy of the knowledge economy have captured the attention of researchers and business enterprises in the World Trade Organization (WTO) era. IC is widely recognized as a tool that is critical to running a successful business in a highly competitive environment. Various models have been introduced to measure the numerous facets of IC, including the Skandia navigator, Tobin's Q, and value added intellectual coefficient (VAIC). This article examines the role of IC efficiency in the firm’s net profit using the VAIC developed by Ante Pulic (1998). It also investigates its correlation with the firm’s profitability, using regression models. A five-year data set for Lahore Stock Exchange Index companies (LSE-25) was obtained from audited financial reports, and used to calculate human capital, structural capital, and capital-employed efficiency of companies in different industrial sectors. The results obtained using multiple regression analysis supports the argument that IC efficiency contributes significantly to the firm's profitability. Practically, IC efficiency can be used as a benchmark and strategic indicator to direct financial and intellectual resources in the right direction, i.e., to enhance the firm’s ultimate corporate value. It can also be developed as a management tool to create a sustainable comparative advantage in the competitive global knowledge economy. The study is a pioneering attempt to measure the impact of IC efficiency on net profit using cross sectional time series data.
KEYWORDS: Knowledge Economy, Intellectual Capital, Value Added, VAIC, LSE-25.
JEL: C22, C59.

The available evidence in Pakistan suggests that inflation is a monetary phenomena. This paper examines the relationship between the determinants of inflation and its volatility by using monthly data for 1990:M1-2007:M5. The determinants of inflation are estimated by a VAR analysis, which shows that inflation, the interest rate and money supply move together. A VAR model assumes constant error variance. We relaxed this assumption by employing an ARCH/GARCH model and conclude that inflation is volatile in nature. For measuring the qualitative nature of the inflationary process we used an EGARCH model. It confirms that the time effect model is significant. It also suggests that in the first four months of the calendar year, the inflationary shock is negative and it can, therefore, hamper growth.
KEYWORDS: Inflation, Volatility, Pakistan, Money Supply, Interest Rate.
JEL: E31, E51, C01.

Greif, Avner, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade. Cambridge University Press, 2008, pp. 452, Price £19.99. In a comparative study of the late medieval European and Muslim worlds, Greif analyzes the effect of institutions—especially those that facilitated impersonal exchange, such as trade—on the performance of modern economies. His argument rests on the premise that past institutions have an effect on consequent ones, and he contributes the disparity in performance of the Muslim and European economies to their distinct institutional trajectories. The book comprises several parts. It defines institutions in great detail; provides a comparative account of institutions in the medieval European and Muslim worlds; and applies a theoretical, analytical, and empirical framework—particularly game theory—to studying institutions.
KEYWORDS: Modern Economy, European and Muslim worlds, theoretical, analytical, empirical framework.
JEL: N/A.

In April 2008, the Centre for Research in Economics and Business (CREB) at the Lahore School of Economics hosted the Fourth Annual Conference on the Management of the Pakistan Economy on the theme, “Ensuring Stable and Inclusive Growth.” The Centre’s director, Naved Hamid, invited a number of prominent speakers including academics, economists, current and former government officials, and other experts to present a combination of research and policy papers, which can be broadly grouped under two major headings: i) Pakistan’s macroeconomy and ii) Poverty and inequality in Pakistan. These topics were selected because of their timeliness, given the increasing macroeconomic pressures facing the country, in particular those coming from the exchange rate and inflation, and the impacts on poverty that could result. The papers presented at the conference are summarized below:
KEYWORDS: Pakistan, CREB, Lahore School, fourth, annual conference, Pakistan Economy, inclusive growth.
JEL: N/A.