The significance of P/Es for portfolio returns

Peavy, John W.; Goodman, David A.

doi:10.3905/jpm.1983.408913

Cited by 50 publications

(11 citation statements)

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“…E + /P ratio: There is a simple positive relation between E + /P ratio and stock returns. Our results, like that of Basu (1983) and Peavy and Goodman (1983) also show that high E + /P (low P/E) stocks still do better when size is included in the regression (Table 2). Further, E + /P ratio remains significant when we include B/M ratio or size in the regression.…”

Section: Size and B/m Ratiosupporting

confidence: 75%

“…Thus, some researcher believed that it was size, and not P/E ratio that influenced the stock returns (Reinganum, 1981). However, subsequent studies showed that high E/P (low P/E) stocks still do better when size and market beta are included in the tests (Basu, 1983;Peavy and Goodman, 1983). Bhandari (1988) pointed out yet another contradiction in the CAPM.…”

Section: Review Of Previous Studiesmentioning

confidence: 99%

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The Expected Stock Returns Of Malaysian Firms: A Panel Data Analysis

Pandey

2002

SSRN Journal

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We used panel data set of 1729 observations (247 Malaysian companies listed on the Kuala Lumpur Stock Exchange for 1993-2000) to identify variables that could explain expected returns of Malaysian stocks. Our results are based on the fixed effects regression model as it performed better than the random effects model and OLS model without the firm effects. Results of the fixed-effect univariate regressions indicated that beta, size, book-to-market value (B/M) ratio, earnings-price (E/P) ratio and dividend yield individually played a significant role in explaining stock returns and payout and leverage had no effect. The explanatory power of size (natural log of market capitalisation) was the highest. The fixed-effect multivariate regression results showed that size was persistently a significant dominant variable together with other variables in explaining stock returns. Beta was found to have consistently a positive relation with stock returns by itself and together with other variables. But its explanatory power was less than size and other variables. Contrary to the results of Fama and French (1992), B/M ratio was not persistently a significant variable; its significance disappeared when we incorporated size and E/P ratio in regression.

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Section: Size and B/m Ratiosupporting

confidence: 75%

Section: Review Of Previous Studiesmentioning

confidence: 99%

The Expected Stock Returns Of Malaysian Firms: A Panel Data Analysis

Pandey

2002

SSRN Journal

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“…44Some recent examples of studies addressing the P/E effect include Basu [3],[4], Reinganum [7], and Peavy and Goodman [6]. All of these studies exclude firms with negative earnings and/or require firms to have fiscal years ending in December.…”

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confidence: 99%

Sample‐Dependent Results Using Accounting and Market Data: Some Evidence

Banz¹,

Breen²

1986

The Journal of Finance

198

111

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Studies relating accounting and price data often use the COMPUSTAT or related PDE data base as the source for the accounting data. This practice may introduce a lookahead bias and an ex-post-selection bias into the study. We examine this problem by comparing results from the standard COMPUSTAT data base with those from a data base which suffers from neither bias. We find that rates of return from portfolios chosen on the basis of accounting data from the two data bases differ significantly. Further, we find that these differences imply different conclusions when we test a specific hypothesis relating accounting and price data. Finally, we propose a number of remedies which may reduce the bias when the standard COMPUSTAT data base is used. THE RELATIONS AMONGTHE economic activities of the firm, the accounting measures of these activities, and the market returns on the debt and the equity of the firm are of central interest to financial economists. Recently, there has been a renewed interest in the empirical relation between market return to equity and basic characteristics of the firm, such as the size and earnings yield of the firm.' Some researchers use the so-called merged COMPUSTAT file for the PDE (price-dividendearnings) file which includes all firms which were on the file at any time during the sample period. This file is obviously not subject to the survivor bias. 779 780 The Journal of Finance The look-ahead bias is due to a dating problem. Data reported for a particular point in time, say at the end of the year, typically are not actually available to the investor until sometime later in the next year. Computing earnings yields with year-end prices and earnings may imply the ability of the investor to forecast future reported earnings without error. For example, the annual COMPUSTAT file reports earnings of $1.24 per share for Zenith for year end 1978. The 12month earnings per share actually observed by the investor as of December 31, 1978 was $0.85 per share. At a December 31, 1978 price of $12.87, the earnings yield computed using the COMPUSTAT data file was 9.6%, whereas the earnings yield using observed data was 6.6%. As might be expected, the price of Zenith stock went from the year-end price of $12.87 to a March ending price (when the new earnings were known to investors) of $15.00.Empirical researchers have long been aware of these potential problems. Until now, there has been no practical way of measuring the size of the biases introduced. Some studies have ignored the problems, others have used various measures designed to reduce the biases, while some have claimed that the biases are of a negligible magnitude.4The purpose of this paper is to examine the effect of the described idiosyncracies of the COMPUSTAT data base using two empirical relations, the "P/E effect" and the "small firm effect" as examples. We show that there are significant differences in returns to portfolios formed using the COMPUSTAT data base and returns to portfolios formed using a data source which does not have the look-...

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“…Bleiberg (1989) demonstrated that the longer the observed sample period the stronger the relationship between high PE ratios and the S&P 500 stocks' future returns. Basu (1977), Cook and Rozeff (1984), Jaffe et al (1989), Peavy and Goodman (1983), and Fairfield and Harris (2010) all agreed that stocks with low PE ratios generate higher returns.…”

Section: Size Value and Pe E®ectsmentioning

confidence: 87%

Relationship Between Market Orders and Stock Returns: Evidence from Taiwan

Chang

Chien

Hsu³

2014

Rev. Pac. Basin Finan. Mark. Pol.

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Unlike previous studies that adopted price as the reference point in this paper we employ the adjusted order imbalance that relates to volume as a reference. We examine the relationship between a firm's characteristics and stock returns. Adjusted order imbalance, including trading direction of stock index and trading volume of individual stock and stock index, is freely and easily obtained by investors in Taiwan. Employing the panel regression model, this paper found prior adjusted order imbalance has a significantly positive relationship with individual stock returns. Additionally, empirical results show that adjusted order imbalance enhances the impacts of the value and size variables.

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The significance of P/Es for portfolio returns

Cited by 50 publications

References 0 publications

The Expected Stock Returns Of Malaysian Firms: A Panel Data Analysis

The Expected Stock Returns Of Malaysian Firms: A Panel Data Analysis

Sample‐Dependent Results Using Accounting and Market Data: Some Evidence

Relationship Between Market Orders and Stock Returns: Evidence from Taiwan

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