Are PE- and MB-Ratios Susceptible to Accruals, Growth, or Profitability?

48 Pages Posted: 25 Jan 2010 Last revised: 20 Dec 2011

See all articles by Martin Staehle

Martin Staehle

University of Bern - Institute for Accounting

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences

Date Written: June 1, 2010

Abstract

Price Earnings- and Market Book-ratios presume a systematic link between financial statement data and company value. We analyze this relationship in a steady state model with overlapping capacity investments where company value is inferred from a constant growth residual income model. We investigate the joint influence of accruals, growth, and profitability on the ratios and evaluate distortions in relation to economic benchmarks. Exemplary we assess the biases that result from linear depreciation and direct expensing. The overall results indicate, that the PE-ratio is less sensitive to the modeled influences compared to the MB-ratio, for which we find large biases. Both ratios are more susceptible to conservatism/liberalism induced by direct expensing than to biases induced through linear depreciation.

Keywords: Price earnings ratio, market to book ratio, steady state model, neutral accounting, accrual accounting

JEL Classification: G31, M41

Suggested Citation

Staehle, Martin and Lampenius, Niklas, Are PE- and MB-Ratios Susceptible to Accruals, Growth, or Profitability? (June 1, 2010). Available at SSRN: https://ssrn.com/abstract=1542023 or http://dx.doi.org/10.2139/ssrn.1542023

Martin Staehle (Contact Author)

University of Bern - Institute for Accounting ( email )

Switzerland

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences ( email )

Stuttgart, 70593
Germany

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