King of the Mountain: Shiller P/E and Macroeconomic Conditions

Arnott, Richard; Chaves, Denis B.; Chow, Tzee-man

doi:10.2139/ssrn.2640327

Cited by 5 publications

(3 citation statements)

References 13 publications

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“…The above could result in increased values of the R 2 which could lead to an increased predictability than the actual one and biased t-statistic values, which in turn could lead us to reject the null hypothesis of the unpredictability of our regression models. For this reason, we used the Newey-West HAC (Heteroskedasticity and Autocorrelation Covariance) estimators, which are the ones most commonly used in empirical studies containing overlapping data (Harri and Brorsen 1998 ; Arnott et al 2017 ) to estimate more accurately the errors in both autocorrelation and heteroskedasticity.…”

Section: Resultsmentioning

confidence: 99%

On the predictive power of CAPE or Shiller’s PE ratio: the case of the Greek stock market

2021

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This paper examines the capability of the Cyclically Adjusted Price to Earnings (CAPE) or Shiller's P/E ratio, along with other relative valuation ratios such as the P/E and the P/BV, to predict future returns of the FTSE/ASE Large Cap Index, starting from the development of the index (1997) to December 2018. We have herein used several regression models in order to examine the relationship between the above ratios and the future returns of 1, 3, 5 and 10 years. We show that, while P/E and P/BV ratios are not correlated to future returns, the CAPE ratio and its variation CAPE 5, which uses real 5 year earnings, are efficient estimators of future returns. Our results imply the informational inefficiency of the Greek Stock Market.

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Section: Resultsmentioning

confidence: 99%

On the predictive power of CAPE or Shiller’s PE ratio: the case of the Greek stock market

2021

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“…Furthermore, Arnott et al (2015) find that P/E ratios typically decline historically when real interest rates are particularly low or high. "When inflation or real interest rates deviate from their 'sweet spot'-in either direction-valuations tend to fall."…”

Section: Corporate Valuationsmentioning

confidence: 99%

“…"When inflation or real interest rates deviate from their 'sweet spot'-in either direction-valuations tend to fall." Given the low levels of inflation and real interest rates today, the Arnott et al (2015) model implies that P/E ratios should not be historically high. The fact that they are historically high suggests that expected g r is also unusually high or that equity risk premiums are unusually low.…”

Section: Corporate Valuationsmentioning

confidence: 99%

Are US Companies Too Short-Term Oriented? Some Thoughts

Kaplan

2018

Innovation Policy and the Economy

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Thanks to Josh Lerner, Yasin Ozcan and Scott Stern and participants at the NBER's Innovation Policy and the Economy Conference for helpful comments. And thanks to the Fama-Miller Center at Chicago Booth for financial support. Kaplan has sat on the boards of several U.S. companies and one U.S. mutual fund. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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Are U.S. Companies Too Short‐Term Oriented? Some Thoughts

Kaplan

2018

J Applied Corp Finance

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Today's widespread criticism of U.S. companies as shortsighted and ever willing to sacrifice their future for near‐term profit is by no means new. As the author of this article shows, such charges of short‐termism have a long history that goes back at least 40 years. But as he goes on to point out, if these claims were warranted, then the effects we have been warned about all these years would surely have shown up by now.But it is difficult to find evidence of such effects. For example, a short‐term orientation has not been reflected in any erosion of corporate profitability over time. As the author reports, the ratio of U.S. corporate profits as a percentage of U.S. GDP has not only been on a generally upward trend since the early 1980s, but has never been higher than in the past few years. And corporate spending on R&D has also gone up sharply during this period, from 1.1% of GDP in 1977 to 1.7% in 2016. What's more, evidence of short‐termism has not shown up in either higher amounts of investment, or higher rates of return, by venture capitalists and private equity firms, which are both in a good position to profit from widespread corporate failure to pursue valuable growth opportunities.Nor do stock market investors appear to encourage corporate short‐termism, given their willingness to fund IPOs of companies with no previous earnings, and to assign high price‐earnings multiples to companies, like Amazon and Tesla, whose reported earnings have been modest at best. What's more, the fact that today's P/E and CAPE ratios are at relatively high levels suggests that the market continues to expect significant rates of growth by U.S. companies.Some critics, to be sure, have argued that the high level of corporate buybacks and other distributions of cash, when combined with today's near‐record corporate cash holdings, provide clear evidence of a widespread failure of companies to invest in their future. But as the author notes, such distributions in fact represent a fairly small fraction—only around 20%—of after‐tax corporate net income after infusions of new debt and equity capital are also taken into account.

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King of the Mountain: Shiller P/E and Macroeconomic Conditions

Cited by 5 publications

References 13 publications

On the predictive power of CAPE or Shiller’s PE ratio: the case of the Greek stock market

On the predictive power of CAPE or Shiller’s PE ratio: the case of the Greek stock market

Are US Companies Too Short-Term Oriented? Some Thoughts

Are U.S. Companies Too Short‐Term Oriented? Some Thoughts

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