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THE RELATIONSHIP BETWEEN SECURITIES YIELDS, FIRM SIZE, EARNINGS/PRICE RATIOS AND TOBIN'Sq

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  • S.G. Badrinath
  • Omesh Kini

Abstract

Several studies in financial economics have found a positive relationship between stock returns and firm size. This relationship persists even after controlling for various measures of risk. There is also a well documented inverse relationship between stock returns and the Price/Earnings (P/E) ratio. However, there is still substantial controversy whether the size effect subsumes the P/E effect or vice versa. In this paper, we demonstrate that neither the size nor the P/E effect subsumes the other. We introduce Tobin's q as a variable that is closely related to stock returns as well as to both the size and P/E effects and show that the size effect persists after controlling for both P/E and q, while the P/E effect becomes much smaller after controlling for size and q. This leads us to conclude that the size effect is more robust to additional controls such as Tobin's q than the P/E effect. Finally, the size effect is almost entirely a January phenomenon whereas the P/E effect is a non‐January effect.

Suggested Citation

  • S.G. Badrinath & Omesh Kini, 1994. "THE RELATIONSHIP BETWEEN SECURITIES YIELDS, FIRM SIZE, EARNINGS/PRICE RATIOS AND TOBIN'Sq," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 21(1), pages 109-131, January.
    • Handle: RePEc:bla:jbfnac:v:21:y:1994:i:1:p:109-131
    DOI: 10.1111/j.1468-5957.1994.tb00308.x
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