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Pe Ratios, Earnings Expectations, And Abnormal Returns

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  • April Klein
  • James Rosenfeld

Abstract

This study provides evidence that the price‐earnings (PE) ratio effect is not homogeneous across firms with similar PE ratios. Instead, firms with the lowest PE ratios and those with the lowest expected annual earnings per share outperform all other groups in January. These results can be partially attributed to security analysts consistently underestimating reported earnings of firms with the lowest level of expected earnings and the lowest PE ratios. A negative October effect is also found for the same‐firms, which appears to be caused by downward revisions in analysts' forecasts between September 16 and November 16.

Suggested Citation

  • April Klein & James Rosenfeld, 1991. "Pe Ratios, Earnings Expectations, And Abnormal Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(1), pages 51-64, March.
    • Handle: RePEc:bla:jfnres:v:14:y:1991:i:1:p:51-64
    DOI: 10.1111/j.1475-6803.1991.tb00644.x
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    Cited by:

    1. Easterday, Kathryn E. & Sen, Pradyot K., 2016. "Is the January effect rational? Insights from the accounting valuation model," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 168-185.
    2. Chang, Millicent & Dallas, Isabel & Ng, Juliana, 2002. "Analyst forecast revisions and asset allocation in Asia-Pacific markets," Journal of Multinational Financial Management, Elsevier, vol. 12(4-5), pages 391-409.
    3. Bozeman, Dennis P. & Kacmar, K. Michele, 1997. "A Cybernetic Model of Impression Management Processes in Organizations," Organizational Behavior and Human Decision Processes, Elsevier, vol. 69(1), pages 9-30, January.
    4. Prem Jain & Joshua Rosett, 2006. "Macroeconomic variables and the E/P ratio: Is inflation really positively associated with the E/P ratio?," Review of Quantitative Finance and Accounting, Springer, vol. 27(1), pages 5-26, August.
    5. Yan Wang & Yuan George Shan & Zhuqian He & Changheng Zhao, 2022. "Other comprehensive income, corporate governance, and firm performance in China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(1), pages 262-271, January.

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