Rankings of Published Price-Earnings Ratios and Investor Attention

69 Pages Posted: 4 Jun 2015 Last revised: 28 Jul 2016

See all articles by Jordan Moore

Jordan Moore

Rowan University - Accounting & Finance

Date Written: June 1, 2015


Active investors with limited attention and capital constraints use fundamental metrics to screen and sort potential investments. Price-earnings (P/E) ratios are extremely popular, and are typically calculated using four trailing quarters of net income. Changes in the rankings of published P/E ratios may influence investor attention and subsequent excess returns. From 1974-2013, decile long-short portfolios formed on characteristics of P/E rankings which are rebalanced monthly earn value-weighted monthly excess returns of 101 basis points with annual Sharpe ratios of 0.79. Decile long-short portfolios which are rebalanced daily earn value-weighted daily excess returns of 16.99 basis points with annual Sharpe ratios of 2.91. Excess returns are robust to size, value, profitability, investment, price momentum, earnings momentum, short-term reversals, and relative volume. Changes to a stock's P/E ranking predicts excess returns even when the stock's P/E ratio itself does not change. The return premium cannot be explained by fundamental risk, clustering of attention at round number P/E ratios, or autocorrelation in the regressors.

Keywords: Empirical Asset Pricing, Behavioral Finance, P/E Ratios

JEL Classification: G12

Suggested Citation

Moore, Jordan, Rankings of Published Price-Earnings Ratios and Investor Attention (June 1, 2015). 28th Australasian Finance and Banking Conference, Available at SSRN: https://ssrn.com/abstract=2613157 or http://dx.doi.org/10.2139/ssrn.2613157

Jordan Moore (Contact Author)

Rowan University - Accounting & Finance ( email )

Glassboro, NJ 08028
United States

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