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Price Earning Ratio and Market to Book Ratio

Listed author(s):
  • Khan, Muhammad Irfan

This paper studies the effects of P/E ratio and M/B ratio on stock return of listed firms with Karachi Stock Exchange in the Textile sector of Pakistan. A total of 30 major firms out of 162 in the textile sector listed with the Karachi Stock Exchange for the period of 2001-2006 were selected on the basis of their size in terms of total assets. Firms which have larger size in terms of total assets among 162 firms were selected in this paper. The study reveals that the firms in an exclusive sector exhibit unique attributes that are sector specific and cannot be applied to or judged by combined analysis of the industry. The result shows that coefficients of independent variables are statistically insignificant. This means that stock return is not depending on any of the two independent variables. Besides insignificant coefficients, coefficients of determination are also very low in each case. This means that a very low percentage of change in stock return is explained by these two variables. The data was analyzed by running linear regression. Two independent variables i.e. P/E ratio and M/B ratio were selected to see their effects on stock return. Multiple regression models along with a measure of correlation were used to study the effect of the independent variables on the dependent variable. The results for the study revealed that stock return is independent of the two independent variables studied in this paper.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23969.

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Date of creation: 2009
Publication status: Published in IUB Journal of Social Sciences and Humanities 2.7(2009): pp. 103-112
Handle: RePEc:pra:mprapa:23969
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  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
  2. Rozeff, Michael S. & Kinney, William Jr., 1976. "Capital market seasonality: The case of stock returns," Journal of Financial Economics, Elsevier, vol. 3(4), pages 379-402, October.
  3. Jegadeesh, Narasimhan, 1990. " Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-898, July.
  4. Louis H. Fritzemeier, 1936. "Relative Price Fluctuations of Industrial Stocks in Different Price Groups," The Journal of Business, University of Chicago Press, vol. 9, pages 133-133.
  5. Pinches, George E. & Simon, Gary M., 1972. "An Analysis of Portfolio Accumulation Strategies Employing Low-Priced Common Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(03), pages 1773-1796, June.
  6. 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.
  7. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  8. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
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