P|E changes: some new results

Thomas Zorn, Donna Dudney and Benjamas Jirasakuldech
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Thomas Zorn: Department of Finance, University of Nebraska-Lincoln, Nebraska, USA, Postal: Department of Finance, University of Nebraska-Lincoln, Nebraska, USA
Donna Dudney: Department of Finance, University of Nebraska-Lincoln, Nebraska, USA, Postal: Department of Finance, University of Nebraska-Lincoln, Nebraska, USA
Benjamas Jirasakuldech: School of Business, Slippery Rock University of Pennsylvania, USA, Postal: School of Business, Slippery Rock University of Pennsylvania, USA

Journal of Forecasting, 2009, vol. 28, issue 4, 358-370

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. Copyright © 2008 John Wiley & Sons, Ltd.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:jof:jforec:v:28:y:2009:i:4:p:358-370

DOI: 10.1002/for.1097

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