P-E Multiples and Changing Interest Rates

NYU Stern School of Business Working Paper

27 Pages Posted: 31 Aug 2000

See all articles by Dhananjay (Dan) K. Gode

Dhananjay (Dan) K. Gode

New York University (NYU) - Department of Accounting

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: July 7, 2000

Abstract

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 [1995] 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.

Note: An older version of this paper was entitled "Valuation, Linear Information Dynamic, and Stochastic Discount Rates."

JEL Classification: M41, G12

Suggested Citation

Gode, Dhananjay (Dan) K. and Ohlson, James A., P-E Multiples and Changing Interest Rates (July 7, 2000). NYU Stern School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=236058 or http://dx.doi.org/10.2139/ssrn.236058

Dhananjay (Dan) K. Gode (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States
212-998-0021 (Phone)
212-995-4004 (Fax)

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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