The long-term price-earnings ratio

Anderson, K. and Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153 (2006) The long-term price-earnings ratio. Journal of Business Finance and Accounting, 33 (7-8). pp. 1063-1086. ISSN 1468-5957 doi: 10.1111/j.1468-5957.2006.00621.x

Abstract/Summary

price-earnings ratio;value premium;arbitrage trading rule;UK stock returns;contrarian investment Abstract:  The price-earnings effect has been thoroughly documented and is the subject of numerous academic studies. However, in existing research it has almost exclusively been calculated on the basis of the previous year's earnings. We show that the power of the effect has until now been seriously underestimated due to taking too short-term a view of earnings. Looking at all UK companies since 1975, using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%. This is similar to other authors' findings. We are able to almost double the value premium by calculating the P/E ratio using earnings averaged over the previous eight years.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/20508
Identification Number/DOI	10.1111/j.1468-5957.2006.00621.x
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Blackwell Publishing Ltd
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