Revisiting the earnings–price effect: The importance of future earnings

Chen, Liwen; Yu, Hsin-Yi; Huang, Hsu-Huei

doi:10.1016/j.frl.2015.02.009

Cited by 10 publications

(6 citation statements)

References 28 publications

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“…In addition to these basic fundamental factors, several empirical studies identify a number of potential determinants of the P/E ratio such as earnings growth, risk-free rate, equity risk premium, market capitalization, debt-to-asset ratio, market-to-book ratio, dividend yield and investor sentiment (Chen et al , 2015; Chua et al , 2015; Sum, 2014; Yin et al , 2014). The rationales and explanations of these determinants are elaborated as follows.…”

Section: Literature Reviewmentioning

confidence: 99%

The impact of dividend policy on price-earnings ratio

Jitmaneeroj

2017

RAF

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Purpose This paper aims to examine the conditional and nonlinear relationship between price-earnings (P/E) ratio and payout ratio. A common finding of previous studies using linear regression model is that the P/E ratio is positively related to the dividend payout ratio. However, none of them investigates the condition under which the positive relationship holds. Design/methodology/approach This paper uses the fixed effects model to investigate the conditional and nonlinear relationship between P/E ratio and payout ratio. With the inclusion of fundamental factors and investor sentiment, this model allows for nonlinear relationship to be conditioned on the return on equity and the required rate of return. Findings Based on the annual data of industries in the USA over the period of 1998-2014, this paper produces new evidence indicating that when the return on equity is greater (less) than the required rate of return, the P/E ratio and dividend payout ratio exhibit a negative (positive) relationship and positive (negative) convexity. Practical implications Due to the curvature relationship between P/E ratio and payout ratio, the corporate managers and stock investors should pay more attention to the reduction in payout ratio than the rising payout ratio and the companies with low payout ratios than the companies with high payout ratios. Originality/value No previous study has tackled the issue of conditional and nonlinear relationship between P/E ratio and payout ratio. This paper attempts to fill the gap by allowing for nonlinear relationship conditional on the relative values of the return on equity and the required rate of return.

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Section: Literature Reviewmentioning

confidence: 99%

The impact of dividend policy on price-earnings ratio

Jitmaneeroj

2017

RAF

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“…Due to its intuitive appeal and practical simplicity, the price-earnings (P/E) ratio has long been considered as one of the most frequently used measures of stock valuation. A large number of studies of the determinants of P/E ratio focus on whether the variations of P/E ratio can be explained by macroeconomic factors and firm fundamentals such as risk-free interest rate, inflation, equity risk premium, firm size, leverage ratio, dividend payout ratio, earnings growth and price volatility (Anderson and Brooks, 2006; Chen et al , 2015; Cho, 1994; Chua et al , 2015; Houmes and Chira, 2015; Jitmaneeroj, 2016; Kane et al , 1996; Ramcharran, 2002; Reilly et al , 1983; White, 2000). These studies commonly find that the P/E ratio has a positive relationship with dividend payout ratio, firm size and growth of earnings but a negative relationship with risk-free rate, equity risk premium and leverage ratio.…”

Section: Introductionmentioning

confidence: 99%

Does investor sentiment affect price-earnings ratios?

Jitmaneeroj

2017

SEF

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Purpose A large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern that stock valuation is also driven by investor sentiment. This paper aims to extend the existing literature by exploring whether investor sentiment impacts the P/E ratio. Design/methodology/approach The paper examines the determinants of P/E ratio by applying latent variable models with investor sentiment as a latent variable and several fundamental factors as control variables. Investor sentiment is proxied by trading volume, advance-decline ratio and price volatility. Findings Using annual data of the US industries over the period of 1998-2014, the current paper produces new empirical evidence that investor sentiment significantly affects the P/E ratio. This result is robust to the inclusion of several control variables that have been documented to explain the P/E ratio. Practical implications The findings have important implications for investors, as downplaying sentiment can lead to significant errors in making equity investment choices based on the P/E ratio. Originality/value The analytical framework of the current paper is differentiated from the conventional analysis in which the P/E ratio is regressed against control variables and proxies for sentiment, thus falling into the trap of implicitly presupposing that proxies are perfect measures of investor sentiment. As all proxies may have measurement errors to the true but unobservable investor sentiment, the current paper uses latent variable models to shed new light on the influence of investor sentiment on the P/E ratio.

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“…If the P/E ratio of a company is higher than the market P/E, it can suggest an expected potential growth or lower risk or both (Nicholson, 1960). Chen et al (2015) argue that the P/E ratio primarily reflects the current earnings instead of future earnings. In other words, both the P/E ratio and the cap rate of an investment vehicle would SLB to market cap rate ratio be less than the markets' when there is an expected income growth or a lower risk than the markets.…”

Section: Literature Reviewmentioning

confidence: 99%

Sale and leaseback to market cap rate ratio in emerging markets – an empirical study in Vietnam

Truong

Yiu

2021

JPIF

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PurposeThis study hypothesises that sale and leaseback (SLB) cap rate is lower than the market cap rate in emerging economies, and the difference is due to institutional cost and vacancy risk. This study aims to provide a novel SLB-Cap-Rate Model to assess the performance of SLB transaction (SLBT).Design/methodology/approachSLBT data are generally not publicly available in developing countries. This study collected data from 31 SLBTs by conducting semi-structured interviews with stakeholders in Vietnam in 2019. The market cap rates were collected from consultants' reports. The hypotheses are tested by three regression models.FindingsThe results show that the SLBT cap rate is significantly less than the market cap rate in Vietnam, and most of the cap rate discount can be explained by institutional and risk factors. This suggests that SLBT helps to reduce search costs for tenants and vacancy risks. It explains why SLBTs are becoming more common in emerging countries.Practical implicationsThe study has a strong practical implication for assessing the performance of SLBT for both buyers and sellers. It introduces a novel model for analysing the cap rates and potential risks of SLBT to facilitate property investment decisions.Originality/valueThis paper is one of the studies that contains new knowledge on SLBs in a developing country specifically Vietnam.

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Revisiting the earnings–price effect: The importance of future earnings

Cited by 10 publications

References 28 publications

The impact of dividend policy on price-earnings ratio

The impact of dividend policy on price-earnings ratio

Does investor sentiment affect price-earnings ratios?

Sale and leaseback to market cap rate ratio in emerging markets – an empirical study in Vietnam

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