Mean Reversion in Earnings and the Use of E/P Multiples in Corporate Valuation

Abstract

We analyze how E/P multiples are affected when firms experience an unusual change in earnings. Those firms with earnings changes that are below the industry median have E/P ratios that are also below the median. Conversely, those firms with earnings changes above the median have E/P ratios that are above the industry median. We conclude that current earnings have an economically important impact on industry-adjusted E/P ratios.

JEL Classification: G12, G14