P/E changes: some new results

Abstract

The P/E ratio is often used as a metric to compare individual stocks and the market as a whole relative to historical valuations. We examine the factors that affect changes in the inverse of the P/E ratio (E/P) over time in the broad market (S&P 500 Index). Our model includes variables that measure investor beliefs and changes in tax rates and shows that these variables are important factors affecting the P/E ratio. We extend prior work by correcting for the presence of a long-run relation between variables included in the model. As frequently conjectured, changes in the P/E ratio have predictive power. Our model explains a large portion of the variation in E/P and accurately predicts the future direction of E/P, particularly when predicted changes in E/P are large or provide a consistent signal over more than one quarter.

Price-earnings changes during US presidential election cycles: voter uncertainty and other determinants

“…Additionally, in a recent study of quarterly changes in P/E, Zorn et al (2009) include this variable-although they do not find it to be significant. As noted by Zorn et al (2009), Kane et al (1996) suggest that corporate bond spreads widen during recessions. Therefore, corporate bond spreads may partially capture a business-cycle effect on P/E ratios.…”

“…We consider that corporate yield spreads may be related to stock-market volatility (Campbell and Taksler 2003). Additionally, in a recent study of quarterly changes in P/E, Zorn et al (2009) include this variable-although they do not find it to be significant. As noted by Zorn et al (2009), Kane et al (1996) suggest that corporate bond spreads widen during recessions.…”

“…A number of papers find significant correlation between P/E and earnings expectations (e.g., Zarowin 1990;Allen and Cho 1999;Ramcharran 2002). Recently, Zorn et al (2009) affirm these findings, determining that investor optimism is an important factor affecting the US P/E ratio.…”

Price-to-earnings ratio: A state-of-art review

“…According to Zorn et al (2009), the P/E ratio is normally implemented as a metric to compare individual stocks and the market as a whole relative to historical valuations. Zorn et al (2009) investigated the factors that influence changes in the inverse of the P/E ratio (E/P) over time in S&P 500 Index.…”

“…Zorn et al (2009) investigated the factors that influence changes in the inverse of the P/E ratio (E/P) over time in S&P 500 Index. The proposed model included variables which measure investor beliefs and changes in tax rates and indicated that these variables were essential factors influencing on the P/E ratio.…”