Expected P/E, Residual P/E, and Stock Return Reversal: Time-Varying Fundamentals or Investor Overreaction?

Ying Huang, Chia-Hui Tsai and Carl R. Chen
Additional contact information
Ying Huang: School of Business, Manhattan College, U.S.A.
Chia-Hui Tsai: First Taisec Capital Management, Taiwan
Carl R. Chen: Department of Economics and Finance, University of Dayton, U.S.A.

International Journal of Business and Economics, 2007, vol. 6, issue 1, 11-28

Abstract: We decompose P/E ratios into a fundamental component and a residual component that cannot be explained by the firm or economic fundamentals. Purging the fundamental component from observed P/E ratios, we find that portfolios based on residual P/E ratios exhibit performance reversal only in overbid glamour stocks; hence over-optimism is more prevalent than over-pessimism.

Keywords: P/E ratios; overreaction; market efficiency (search for similar items in EconPapers)
JEL-codes: G30 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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