The Investment Performance of Common Stocks in Relation to Their Price–Earnings Ratios: An Update of the Basu Study

Johnson, R. Stafford; Fiore, Lyle C.; Zuber, Richard A.

doi:10.1111/j.1540-6288.1989.tb00355.x

Cited by 10 publications

(26 citation statements)

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“…Jones (1987) and Johnson et al (1989) are among those who find the opposite results in their studies. Jones found that stocks with low P/E ratio produced significantly lower risk adjusted rates of return as compared to those following the Standard and Poor 500 or other investment strategies.…”

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confidence: 92%

“…This study, by repeating partially Johnson et al (1989) procedures, was trying to confirm the low P/E effect hypothesis in Indonesian market. The study involved 267 stocks listed in Jakarta Stock Exchange in the sample frame and selected the period of 1994-2000 as the focus of analysis.…”

Section: From Practical Point Of View Price-earnings (P/e) Ratio Is mentioning

confidence: 99%

“…Jones found that stocks with low P/E ratio produced significantly lower risk adjusted rates of return as compared to those following the Standard and Poor 500 or other investment strategies. Similarly, Johnson et al (1989) found that low P/E ratio portfolios earned the lowest average monthly rates of return -even lower than the monthly risk-free rate.…”

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confidence: 99%

“…However, noting its importance, there are some significant disagreements among researchers regarding the ability of P/E ratio in providing "correct information" about the future return of company stocks. One of the topics under discussion is about the presence of so-called low P/E effect, which hypothesizes that high P/E will be followed by low returns and low P/E will be followed by high returns.This study, by repeating partially Johnson et al (1989) procedures, was trying to confirm the low P/E effect hypothesis in Indonesian market. The study involved 267 stocks listed in Jakarta Stock Exchange in the sample frame and selected the period of 1994-2000 as the focus of analysis.…”

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confidence: 99%

“…The steps and procedures employed by Johnson et al (1989) -who followed Basu's procedures-are partially applied in the study. Johnson et al (1989) investigated the relationship between the investment performance of stocks and their P/E ratios.…”

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confidence: 99%

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RE-EXAMINING THE EXISTENCE OF LOW PRICE-EARNINGS RATIO EFFECTS: A Descriptive Approach to the Case of Indonesian Stock Market

Asri

1999

GADJAH MADA INT. J. BUS.

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From practical point of view, Price-Earnings (P/E) ratio is one of numerous important aspects to consider. Analysts, investors, and traders in stock markets use P/E ratio -together with other information-in analyzingthe past performance, and predicting the future prospect of securities in the market. However, noting its importance, there are some significant disagreements among researchers regarding the ability of P/E ratio in providing "correct information" about the future return of company stocks. One of the topics under discussion is about the presence of so-called low P/E effect, which hypothesizes that high P/E will be followed by low returns and low P/E will be followed by high returns.This study, by repeating partially Johnson et al. (1989) procedures, was trying to confirm the low P/E effect hypothesis in Indonesian market. The study involved 267 stocks listed in Jakarta Stock Exchange in the sample frame and selected the period of 1994-2000 as the focus of analysis. The study also has an intention to investigate whether there was a structural change in return-P/E relationship from the pre-crisis period (1994)(1995)(1996) to the crisis period (1998)(1999)(2000).The procedure of analysis was divided into two sections. In the first section a descriptive macro (market) analysis was presented, to test the hypothesis at the market level. It started with an overview about the fluctuation and trend of market P/E ratios during the period of 1991-2000, and followed by investigating the relationship between market P/E and the following returns. A regression analysis was also performed to strengthen the analysis from statistical point of view. In the second section, analysis is more directed to the portfolio level where the portfolios were ranked according to their P/E ratios. The study was concluded with a main finding that does not support the low P/E effect hypothesis.

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confidence: 92%

Section: From Practical Point Of View Price-earnings (P/e) Ratio Is mentioning

confidence: 99%

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confidence: 99%

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confidence: 99%

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confidence: 99%

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RE-EXAMINING THE EXISTENCE OF LOW PRICE-EARNINGS RATIO EFFECTS: A Descriptive Approach to the Case of Indonesian Stock Market

Asri

1999

GADJAH MADA INT. J. BUS.

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Analysis of P/E ratios and interest rates

Amoako‐Adu

Smith

2002

Managerial Finance

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1995),"Forecasting sales, expenses and stock market values by quarterly financial statement ratio analysis: a microcomputer software development model"If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractThis study analyses the relationship between P/E ratios and interest rates from early 1965 to the end of 1997. Historical Canadian data indicate that the average P/E ratio of the TSE 300 Index which was 17.17 in the 1960s and early 1970s decreased to about 8.92 in the periods of high interest rates in the late 1970s and early 1980s. However, in the late 1980s and 1990s the average P/E ratio increased to the previous levels of 17.20 when interest rates were on the decline. A similar pattern was observed for the various industry P/E ratios. The latest period is characterized by higher volatility compared to the previous periods. The correlations between P/Es and interest rates were negative and very high, confirming the inverse relationship between P/E ratios and interest rates. A regression analysis also indicates that interest rates are inversely related to P/E ratios after controlling for other relevant factors. This study, therefore, suggests that the low levels of interest rates, increased dividend payout, low corporate bond risk premium, and higher corporate earnings are the major factors which propelled equity values to their previous high levels.

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Further Evidence on the Relationship Between Ownership and Performance

Hudson

Jahera

Lloyd

1992

The Financial Review

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The objective of this paper is to extend prior research into the relationship between ownership and performance while controlling for the known market anomalies of firm size and earnings to price. The empirical results do support recent works indicating a positive relationship between the degree of insider ownership and performance. Using a piecewise regression model, both size and ownership are found to be significant. An additional finding of the paper supplements several recent works questioning the earlier works of Basu [6, 7].

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The Investment Performance of Common Stocks in Relation to Their Price–Earnings Ratios: An Update of the Basu Study

Cited by 10 publications

References 9 publications

RE-EXAMINING THE EXISTENCE OF LOW PRICE-EARNINGS RATIO EFFECTS: A Descriptive Approach to the Case of Indonesian Stock Market

RE-EXAMINING THE EXISTENCE OF LOW PRICE-EARNINGS RATIO EFFECTS: A Descriptive Approach to the Case of Indonesian Stock Market

Analysis of P/E ratios and interest rates

Further Evidence on the Relationship Between Ownership and Performance

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