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P|E changes: some new results

Author

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  • Thomas Zorn

    (Department of Finance, University of Nebraska-Lincoln, Nebraska, USA)

  • Donna Dudney

    (Department of Finance, University of Nebraska-Lincoln, Nebraska, USA)

  • Benjamas Jirasakuldech

    (School of Business, Slippery Rock University of Pennsylvania, USA)

Abstract

The P|E ratio is often used as a metric to compare individual stocks and the market as a whole relative to historical valuations. We examine the factors that affect changes in the inverse of the P|E ratio (E|P) over time in the broad market (S&P 500 Index). Our model includes variables that measure investor beliefs and changes in tax rates and shows that these variables are important factors affecting the P|E ratio. We extend prior work by correcting for the presence of a long-run relation between variables included in the model. As frequently conjectured, changes in the P|E ratio have predictive power. Our model explains a large portion of the variation in E|P and accurately predicts the future direction of E|P, particularly when predicted changes in E|P are large or provide a consistent signal over more than one quarter. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Thomas Zorn & Donna Dudney & Benjamas Jirasakuldech, 2009. "P|E changes: some new results," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(4), pages 358-370.
    • Handle: RePEc:jof:jforec:v:28:y:2009:i:4:p:358-370
    DOI: 10.1002/for.1097
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    References listed on IDEAS

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    Cited by:

    1. Henk Berkman & Ben Jacobsen & John B. Lee, 2017. "Rare disaster risk and the expected equity risk premium," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(2), pages 351-372, June.

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