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Solving the Price-Earnings Puzzle

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Author Info
Carl Chiarella () (School of Finance and Economics, University of Technology, Sydney)
S. Gao (Discipline of Economics, University of Sydney)

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Abstract

Accounting and finance professionals have empirically known that in the long run stock prices are roughly proportional to earnings. However, econometric testing could not been able to verify this expected contribution of earnings to stock prices, thus formed the price-earnings (PE) puzzle in the accounting literature. This paper seeks to solve this puzzle by allowing the earnings response coefficient to be a variable instead of a constant, and shows that the PE puzzle turns out to be a phenomenon of type I spurious regression in econometrics.

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File URL: http://www.business.uts.edu.au/finance/research/wpapers/wp116.pdf
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Publisher Info
Paper provided by School of Finance and Economics, University of Technology, Sydney in its series Working Paper Series with number 116.

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Date of creation: 01 Apr 2002
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Handle: RePEc:uts:wpaper:116

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Related research
Keywords: price (return)-earnings relation; earnings response coefficient; type I spurious regresssion;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting

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This page was last updated on 2009-12-2.

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