Solving the Price-Earnings Puzzle

Carl Chiarella () and S. Gao
Additional contact information
S. Gao: Discipline of Economics, University of Sydney

No 116, Working Paper Series from School of Finance and Economics, University of Technology, Sydney

Abstract: Accounting and finance professionals have empirically known that in the long run stock prices are roughly proportional to earnings. However, econometric testing could not been able to verify this expected contribution of earnings to stock prices, thus formed the price-earnings (PE) puzzle in the accounting literature. This paper seeks to solve this puzzle by allowing the earnings response coefficient to be a variable instead of a constant, and shows that the PE puzzle turns out to be a phenomenon of type I spurious regression in econometrics.

Keywords: price (return)-earnings relation; earnings response coefficient; type I spurious regresssion (search for similar items in EconPapers)
JEL-codes: C22 G12 M41 (search for similar items in EconPapers)
Date: 2002-04-01

Downloads: (external link)
http://www.business.uts.edu.au/finance/research/wpapers/wp116.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:uts:wpaper:116

Access Statistics for this paper

More papers in Working Paper Series from School of Finance and Economics, University of Technology, Sydney
Address: PO Box 123, Broadway, NSW 2007, Australia
Contact information at EDIRC.
Series data maintained by Duncan Ford ().