Investor sentiment and the price-earnings ratio in the G7 stock markets

Md Lutfur Rahman and Abul Shamsuddin ()

Pacific-Basin Finance Journal, 2019, vol. 55, issue C, 46-62

Abstract: Investment practitioners often interpret an excessively high price-earnings ratio as a reflection of an overvalued market fuelled by optimistic investor sentiment. We examine the role of investor sentiment in explaining the P/E ratio in the G7 countries. The results suggest that after controlling for the effects of fundamental factors, the P/E ratio generally increases with an improvement in investor sentiment. The robustness of the findings to the use of forward P/E ratios, alternative data frequency, and controlling for financial crises is checked. Furthermore, the results from quantile regressions reveal that the effects of investor sentiment vary across the P/E quantiles.

Keywords: Price-earnings ratio; Consumer confidence; Business confidence; G7 stock markets (search for similar items in EconPapers)
JEL-codes: C51 E44 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:55:y:2019:i:c:p:46-62

DOI: 10.1016/j.pacfin.2019.03.003

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