P-E Multiples and Changing Interest Rates
27 Pages Posted: 8 Oct 2008
Date Written: July 2000
How should one conceptualize price-earnings multiples (earnings capitalization factors) when interest rates change stochastically? The paper shows that while the multiplier for forthcoming earnings depends on current rates, the multiplier for current earnings depends on lagged rates. With these ideas in place, the paper generalizes Ohlson  model with particular emphasis on the case when earnings provide sufficient accounting information for valuation. Results do not depend on the stochastic behavior of interest rates. The paper further derives the supporting modified information dynamic and shows how earnings persistence depends on both the current and the lagged rate.
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