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Solving the Price-Earnings Puzzle


Carl Chiarella


University of Technology, Sydney - UTS Business School, Finance Discipline Group; Financial Research Network (FIRN)

Shenhuai Gao


The University of Sydney Business School
April 2002

UTS Working Paper No. 116

Abstract:     
Accounting and finance professionals have empirically known that in the long run stock prices are roughly proportional to earnings. However, econometric testing could not been able to verify this expected contribution of earnings to stock prices, thus formed the price-earnings (PE) puzzle in the accounting literature. This paper seeks to solve this puzzle by allowing the earnings response coefficient to be a variable instead of a constant, and shows that the PE puzzle turns out to be a phenomenon of type I spurious regression in econometrics.

Number of Pages in PDF File: 13

Keywords: price (returns)-earnings relation, earnings response coefficient, type I spurious regression

JEL Classification: C22, G12, M41

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Date posted: February 2, 2006  

Suggested Citation

Chiarella, Carl and Gao, Shenhuai, Solving the Price-Earnings Puzzle (April 2002). UTS Working Paper No. 116. Available at SSRN: http://ssrn.com/abstract=880002 or http://dx.doi.org/10.2139/ssrn.880002

Contact Information

Carl Chiarella (Contact Author)
University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )
PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)
HOME PAGE: http://www.business.uts.edu.au/finance/
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Shenhuai Gao
The University of Sydney Business School ( email )
Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
Feedback to SSRN (Beta)


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