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Dynamic Effect of Tobin's Q on Price-to-Earnings Ratio

Managerial Finance, 40(6), 634-643. May, 2014.

Posted: 12 Jul 2013 Last revised: 30 May 2014

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: July 12, 2013

Abstract

This study investigates the dynamic effect of the change in aggregate Tobin’s q ratio (TBQ) on the percentage change in the S&P 500 price-to-earnings ratio (PE). Based on the analysis of the quarterly market level data from 1951Q4 to 2012Q4, the results show that PE significantly jumps immediately following the shock to TBQ. The results from the Granger-causality tests indicate that TBQ causes PE. There is a reverse causation from PE to TBQ. The variance decomposition results reveal that TBQ forecasts about 10.50% to 17.00% of PE at the two-quarter to eight-quarter horizons.

Keywords: Tobin’s q ratio, price-to-earnings ratio, VAR

JEL Classification: G12, G14, G17

Suggested Citation

Sum, Vichet, Dynamic Effect of Tobin's Q on Price-to-Earnings Ratio (July 12, 2013). Managerial Finance, 40(6), 634-643. May, 2014.. Available at SSRN: https://ssrn.com/abstract=2292812 or http://dx.doi.org/10.2139/ssrn.2292812

Vichet Sum (Contact Author)

University of Maryland Eastern Shore - School of Business and Technology ( email )

2105 Kiah Hall
Princess Anne, MD 21853
United States
410-651-6531 (Phone)
410-651-6529 (Fax)

HOME PAGE: http://www.umes.edu/bma/Sum.html

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