Expected P/E, Residual P/E, and Stock Return Reversal: Time-Varying Fundamentals or Investor Overreaction?
AbstractWe decompose P/E ratios into a fundamental component and a residual component that cannot be explained by the firm or economic fundamentals. Purging the fundamental component from observed P/E ratios, we find that portfolios based on residual P/E ratios exhibit performance reversal only in overbid glamour stocks; hence over-optimism is more prevalent than over-pessimism.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.
Volume (Year): 6 (2007)
Issue (Month): 1 (April)
P/E ratios; overreaction; market efficiency;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Partha Gangopadhyay, 1996. "Macroeconomic Variables And Seasonal Mean Reversion In Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(3), pages 395-416, 09.
- Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-82, June.
- Cook, Thomas J. & Rozeff, Michael S., 1984. "Size and Earnings/Price Ratio Anomalies: One Effect or Two?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(04), pages 449-466, December.
- Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
- Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
- James M. Poterba & Lawrence H. Summers, 1987.
"Mean Reversion in Stock Prices: Evidence and Implications,"
NBER Working Papers
2343, National Bureau of Economic Research, Inc.
- Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
- Reinganum, Marc R., 1981. "Misspecification of capital asset pricing : Empirical anomalies based on earnings' yields and market values," Journal of Financial Economics, Elsevier, vol. 9(1), pages 19-46, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yi-Ju Su).
If references are entirely missing, you can add them using this form.