Solving the Price-Earnings Puzzle
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.
|Date of creation:||01 Apr 2002|
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- Collins, Daniel W. & Kothari, S. P. & Shanken, Jay & Sloan, Richard G., 1994. "Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association," Journal of Accounting and Economics, Elsevier, vol. 18(3), pages 289-324, November.
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451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
- Carl Chiarella & S. Gao, 2002. "Modelling the Value of the S&P 500 - A System Dynamics Perspective," Working Paper Series 115, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- Christie, Andrew A., 1987. "On cross-sectional analysis in accounting research," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 231-258, December.
- Carl Chiarella & S. Gao, 2002. "Type I Spurious Regression in Econometrics," Working Paper Series 114, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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