 The forward E/P ratio and earnings growthWan-Ting Wu Advances in accounting, 2014, vol. 30, issue 1, 128-142 Abstract: Valuation theories predict a negative relation between the earnings-to-price (E/P) ratio and future earnings growth, but prior studies have produced conflicting results. Using a growth measure that incorporates loss firms, this paper shows that the negative relation exists in the long term, but not in the short term. The results also show a U-shaped relation between the forward E/P ratio and earnings risk. Compared with high forward E/P firms which are inherently financially distressed, low forward E/P firms exhibit even higher incidence of loss and larger growth volatility in subsequent years. The wide distribution of earnings growth in the lowest forward E/P portfolio indicates that this portfolio includes not only star firms that generate the strongest earnings growth, but also firms that report the most negative earnings growth. This paper shows that the forward E/P ratio is a stronger predictor of future growth than the conventionally used trailing E/P ratio. Keywords: E/P ratio; Forward E/P ratio; Earnings growth; Risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:30:y:2014:i:1:p:128-142 DOI: 10.1016/j.adiac.2014.04.002 Access Statistics for this article Advances in accounting is currently edited by Dennis Caplan More articles in Advances in accounting from Elsevier |
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