Earnings Per Share and Cash Flow Per Share as Determinants of Share Prices in Different Phases of the Economic Business Cycle as Measured By the Bootstrap Applied to Demsetz’S Method

C Joubert, N J le Roux, J U de Villiers and W D Hamman

Studies in Economics and Econometrics, 2004, vol. 28, issue 1, 58-75

Abstract: Demsetz’s method is used to contrast the ability of earnings per share (EPS) and cash flow per share (CPS) to explain changes in share prices. A comparison is made of the relative ability of these two determinants of changes in share prices during a period of economic decline as well as in a subsequent upswing in the economic cycle. Bootstrap methods are used for constructing standard errors and confidence intervals associated with the statistics derived for describing the differential behaviour of EPS and CPS as determinants of changes in share prices both in an upswing and decline phase of economic activities. Density estimates of these statistics are also shown. It is concluded that the relative merits of EPS and CPS in explaining changes in share prices do not remain stable when the economic cycle changes from a decline to an upswing phase. Therefore, when Demsetz’s method is applied over a period that includes both upswing and decline phases of the economic cycle this could lead to misleading and inaccurate conclusions.

Date: 2004
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DOI: 10.1080/10800379.2004.12106360

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