The Long‐Term Price‐Earnings Ratio

Keith Anderson and Chris Brooks

Journal of Business Finance & Accounting, 2006, vol. 33, issue 7‐8, 1063-1086

Abstract: Abstract: The price‐earnings effect has been thoroughly documented and is the subject of numerous academic studies. However, in existing research it has almost exclusively been calculated on the basis of the previous year's earnings. We show that the power of the effect has until now been seriously underestimated due to taking too short‐term a view of earnings. Looking at all UK companies since 1975, using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%. This is similar to other authors' findings. We are able to almost double the value premium by calculating the P/E ratio using earnings averaged over the previous eight years.

Date: 2006
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