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

Author

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  • Rahman, Md Lutfur
  • Shamsuddin, Abul

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.

Suggested Citation

  • Rahman, Md Lutfur & Shamsuddin, Abul, 2019. "Investor sentiment and the price-earnings ratio in the G7 stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 55(C), pages 46-62.
    • Handle: RePEc:eee:pacfin:v:55:y:2019:i:c:p:46-62
    DOI: 10.1016/j.pacfin.2019.03.003
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    Citations

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    Cited by:

    1. Apergis, Nicholas, 2022. "Overconfidence and US stock market returns," Finance Research Letters, Elsevier, vol. 45(C).
    2. van Eyden, Reneé & Gupta, Rangan & Nielsen, Joshua & Bouri, Elie, 2023. "Investor sentiment and multi-scale positive and negative stock market bubbles in a panel of G7 countries," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    3. Haritha P H & Abdul Rishad, 2020. "An empirical examination of investor sentiment and stock market volatility: evidence from India," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-15, December.
    4. Gao, Yang & Zhao, Chengjie & Wang, Yaojun, 2024. "Investor sentiment and stock returns: New evidence from Chinese carbon-neutral stock markets based on multi-source data," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 438-450.
    5. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Bonsu, Christiana Osei & Karikari, Nana Kwasi & Hammoudeh, Shawkat, 2022. "The effects of public sentiments and feelings on stock market behavior: Evidence from Australia," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 443-472.
    6. Li Shuangjie & Hu Xuefeng & Wang Liming, 2020. "Could the Stock Market Adjust Itself? An Empirical Study Based on Mean Reversion Theory," Journal of Systems Science and Information, De Gruyter, vol. 8(2), pages 97-115, April.
    7. Hu, Zhijun & Sun, Ping-Wen, 2024. "Salience theory, investor sentiment, and commonality in sentiment: Evidence from the Chinese stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    8. Ahmed, Walid M.A., 2020. "Stock market reactions to domestic sentiment: Panel CS-ARDL evidence," Research in International Business and Finance, Elsevier, vol. 54(C).
    9. Peng, Kang-Lin & Wu, Chih-Hung & Lin, Pearl M.C. & Kou, IokTeng Esther, 2023. "Investor sentiment in the tourism stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    10. Dimitrios Kenourgios & Spyros Papathanasiou & Anastasia Christina Bampili, 2022. "On the predictive power of CAPE or Shiller’s PE ratio: the case of the Greek stock market," Operational Research, Springer, vol. 22(4), pages 3747-3766, September.
    11. Fu, Junhui & Wu, Xiang & Liu, Yufang & Chen, Rongda, 2021. "Firm-specific investor sentiment and stock price crash risk," Finance Research Letters, Elsevier, vol. 38(C).

    More about this item

    Keywords

    Price-earnings ratio; Consumer confidence; Business confidence; G7 stock markets;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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