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The Long-Term Price-Earnings Ratio

Keith P. Anderson

The York Management School

Chris Brooks

University of Reading - ICMA Centre

May 2005

The price-earnings effect has been thoroughly documented and widely studied around the world. However, in existing research it has almost exclusively been calculated on the basis of the previous year's earnings. We show that the power of the effect has until now been seriously underestimated, due to taking too short-term a view of earnings. We look at all UK companies since 1975, and using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%, similar to other authors' findings. We are able to almost double the value premium by calculating P/E ratios using earnings averaged over the last eight years. Averaging, however, implies equal weights for each past year. We further enhance the premium by optimising the weights of the past years of earnings in constructing the P/E ratio.

Number of Pages in PDF File: 31

Keywords: price-earning ratios, value investing, arbitrage strategy, UK stock market, value premium

JEL Classification: G11, G12, G14

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Date posted: June 8, 2005  

Suggested Citation

Anderson, Keith P. and Brooks, Chris, The Long-Term Price-Earnings Ratio (May 2005). Available at SSRN: https://ssrn.com/abstract=739664 or http://dx.doi.org/10.2139/ssrn.739664

Contact Information

Keith P. Anderson
The York Management School ( email )
York YO10 5DD
United Kingdom
Chris Brooks (Contact Author)
University of Reading - ICMA Centre ( email )
Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)
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