The Long-Term Price-Earnings Ratio

24 Pages Posted: 3 Oct 2006

See all articles by Keith P. Anderson

Keith P. Anderson

The York Management School

Chris Brooks

University of Reading - ICMA Centre

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Abstract

The price-earnings effect has been thoroughly documented and is the subject of numerous academic studies. 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. Looking at all UK companies since 1975, using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%. This is similar to other authors' findings. We are able to almost double the value premium by calculating the P/E ratio using earnings averaged over the previous eight years.

Suggested Citation

Anderson, Keith P. and Brooks, Chris, The Long-Term Price-Earnings Ratio. Journal of Business Finance & Accounting, Vol. 33, No. 7-8, pp. 1063-1086, September/October 2006. Available at SSRN: https://ssrn.com/abstract=934618 or http://dx.doi.org/10.1111/j.1468-5957.2006.00621.x

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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