Speed of Learning About Firms' Profitability and Their Price Multiples: A Global Perspective

41 Pages Posted: 7 Mar 2008 Last revised: 14 Nov 2015

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Udomsak Wongchoti

Massey University - School of Economics and Finance

Date Written: March 3, 2008

Abstract

We present direct global evidence of declining analyst forecast errors, return volatility, and M/B ratio with progression in a firm’s age in the context of a learning model which focuses on the positive numerator effects of uncertainty about the firm’s profitability. The convex relation between a firm’s age and its M/B is pervasive over time and across countries after controlling for future growth rate, leverage, size, dividend policy, and future return. Strict enforcement of insider trading laws, higher feasibility of short selling, and dominance of local versus foreign investors increase the learning speed and fuel quicker achievement of long run equilibrium valuations.

Keywords: learning, profitability, firm valuation

JEL Classification: G12, G14, G15

Suggested Citation

Jain, Pankaj K. and Wongchoti, Udomsak, Speed of Learning About Firms' Profitability and Their Price Multiples: A Global Perspective (March 3, 2008). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1101856 or http://dx.doi.org/10.2139/ssrn.1101856

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Udomsak Wongchoti (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

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