What is Driving the Price-to-Earnings Ratio: The Effect of Conservative Accounting and Growth

35 Pages Posted: 25 Mar 2013

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: March 25, 2013

Abstract

Forward price-to-earnings ratios (PE ratios) play a central role in financial analysis and valuation. They are used to value comparable firms or to inform about mispriced stocks. We show that past investment growth and conservative accounting hinder a straightforward interpretation of the PE ratio. We analytically derive accounting-based explanations for cross sectional differences of PE ratios and analyze properties of their time series, such as volatility and mean reversion. Further, we illustrate the influence that management can take on the PE ratio by choosing accounting and investment policies. Our analysis identifies variables that drive the PE ratio and that could be used as empirical proxies to evaluate the magnitude of accounting-based influences.

Keywords: price-to-earnings ratio, unconditional conservative accounting, neutral accounting, growth, mean-reversion

JEL Classification: G11, G31, G32, M41

Suggested Citation

Staehle, Martin and Lampenius, Niklas, What is Driving the Price-to-Earnings Ratio: The Effect of Conservative Accounting and Growth (March 25, 2013). Available at SSRN: https://ssrn.com/abstract=2239208 or http://dx.doi.org/10.2139/ssrn.2239208

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
370
Abstract Views
2,441
rank
102,019
PlumX Metrics