Testing the Relation between Price-to-Earnings Ratio and Stock Returns in the Athens Stock Exchange

32 Pages Posted: 27 Dec 2005

See all articles by Lambros Stefanis

Lambros Stefanis

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: December 17, 2005

Abstract

Market anomalies have always been an object of research by many scholars and financial professionals. Among others, Basu (1997), Fama and French (1992), Jaffe, et.al. (1989), and Lakonishok, et.al. (1994) documented the existence of P/E effect as market inefficiency, in the US and UK markets at different periods of time.

Our research showed that the P/E phenomenon also exists in the Athens Stock Exchange (ASE). In respect to our resulting evidence, the ratio is found to be negatively related to subsequent equity performance. Furthermore, accounting variables such as market value and earnings growth play an important role in the explanation of the cross- sectional variation of stock returns. The size-effect as it appears in literature, is found to hold for firms listed on ASE. The resulting evidence presented industry as being an indicative factor of such accounting variables, as well as, past market returns to be negatively related to subsequent stock performance.

We could not verify the existence of P/E effect on firms listed on ASE using the extrapolation model of Lakonishok, et.al. (1994). However, our results are consistent with the overreaction hypothesis of De Bondt and Thaler (1985, 1987) in relation to news announcements.

Keywords: P/E ratio, ASE, Athens stock exchange

JEL Classification: C31, C21

Suggested Citation

Stefanis, Lambros, Testing the Relation between Price-to-Earnings Ratio and Stock Returns in the Athens Stock Exchange (December 17, 2005). Available at SSRN: https://ssrn.com/abstract=872272 or http://dx.doi.org/10.2139/ssrn.872272

Lambros Stefanis (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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