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Observed and 'Fundamental' Price Earning Ratios: A Comparative Analysis of High-tech Stock Evaluation in the US and in Europe

Author

Listed:
  • Leonardo Becchetti

    () (University of Rome II - Faculty of Economics)

  • Michele Bagella

    () (University of Rome II - Faculty of Economics)

  • Fabrizio Adriani

    () (University of Rome II - Centre for International Studies on Economic Growth (CEIS))

Abstract

By assuming that a large share of investors (which we call fundamentalists) follows a fundamental approach to stock picking, we build a discounted cash flow (DCF) model and test on a sample of high-tech stocks whether the strong and the weak version of the model are supported by data from the US and European stock markets. Empirical results show that "fundamental" earning price ratios explain a significant share of cross sectional variation of the observed E/P ratios, with other additional variables being only partially and weakly relevant. Within this general framework, valid both for Europe and the US, empirical results outline significant differences between the two markets. The most relevant of them is that the relationship between observed and fundamental E/P ratios is much weaker in Europe.

Suggested Citation

  • Leonardo Becchetti & Michele Bagella & Fabrizio Adriani, 2003. "Observed and 'Fundamental' Price Earning Ratios: A Comparative Analysis of High-tech Stock Evaluation in the US and in Europe," CEIS Research Paper 34, Tor Vergata University, CEIS.
  • Handle: RePEc:rtv:ceisrp:34
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    financial market microstructure; asset pricing;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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