The Predictive Ability of P/E Ratio: Evidence from Australia and New Zealand

35 Pages Posted: 9 Jan 2014

See all articles by Anup K. Basu

Anup K. Basu

Queensland University of Technology; Financial Research Network (FIRN)

Luke O'Shea

PriceWaterhouseCoopers, Australia

Date Written: January 8, 2014

Abstract

We find negative relationship between historical price-earnings (P/E) ratio and following year’s stock returns in Australia and New Zealand. The existence of P/E effect is consistent with prior research in US market but the effect seems to be stronger and short-lived. Whilst the excess returns of low P/E stocks are not explained by the market risk factor, they are not significant after controlling for size, value, and momentum. We also find evidence of a positive relationship between P/E ratio and the following year’s earnings growth that suggests that investors are generally good at assessing relative earnings growth prospect of companies.

Keywords: P/E ratio, return predictability, earnings growth

JEL Classification: G11, G14

Suggested Citation

Basu, Anup K. and O'Shea, Luke, The Predictive Ability of P/E Ratio: Evidence from Australia and New Zealand (January 8, 2014). 2014 Financial Markets & Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=2376050 or http://dx.doi.org/10.2139/ssrn.2376050

Anup K. Basu (Contact Author)

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Luke O'Shea

PriceWaterhouseCoopers, Australia ( email )

Melbourne VIC 3000
Australia

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