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Expected P/E, Residual P/E, and Stock Return Reversal: Time-Varying Fundamentals or Investor Overreaction?

Author

Listed:
  • Ying Huang

    (School of Business, Manhattan College, U.S.A.)

  • Chia-Hui Tsai

    (First Taisec Capital Management, Taiwan)

  • Carl R. Chen

    (Department of Economics and Finance, University of Dayton, U.S.A.)

Abstract

We 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.

Suggested Citation

  • Ying Huang & Chia-Hui Tsai & Carl R. Chen, 2007. "Expected P/E, Residual P/E, and Stock Return Reversal: Time-Varying Fundamentals or Investor Overreaction?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 6(1), pages 11-28, April.
    • Handle: RePEc:ijb:journl:v:6:y:2007:i:1:p:11-28
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    References listed on IDEAS

    as
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    Cited by:

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    2. Rahman, Oriana & Semenov, Andrei, 2025. "Subjective probabilities under behavioral heuristics," International Review of Economics & Finance, Elsevier, vol. 98(C).
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    4. Manas Mayur, 2015. "Relationship between Price–Earnings Ratios and Stock Value in an Emerging Market," Paradigm, , vol. 19(1), pages 52-64, June.

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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