The impacts of large trades by trader types on intraday futures prices: Evidence from the Taiwan Futures Exchange

We find that China's P/E ratio is comparable to that of the U.S. S&P 1500 index, a broad based index covering large, middle, and small capitalization firms. We provide an explanation as to why China's seemingly low P/E ratio is not surprising in light of the economic growth that it has experienced. Specifically, we show that (i) the P/E ratio is negatively associated with earnings volatility in both the Chinese and U.S. stock markets with an economically significant magnitude; and (ii) historical earnings volatility is considerably higher in China than in the U.S. Higher earnings volatility in China offsets higher growth prospect in setting the P/E ratio, making its P/E ratio much closer to what is observed empirically than otherwise implied by its growth rate.     

Is China's P/E ratio too low? Examining the role of earnings volatility

We find that China's P/E ratio is comparable to that of the U.S. S&P 1500 index, a broad based index covering large, middle, and small capitalization firms. We provide an explanation as to why China's seemingly low P/E ratio is not surprising in light of the economic growth that it has experienced. Specifically, we show that (i) the P/E ratio is negatively associated with earnings volatility in both the Chinese and U.S. stock markets with an economically significant magnitude; and (ii) historical earnings volatility is considerably higher in China than in the U.S. Higher earnings volatility in China offsets higher growth prospect in setting the P/E ratio, making its P/E ratio much closer to what is observed empirically than otherwise implied by its growth rate.     

LOW PRICE, PRICE-EARNINGS RATIO, MARKET VALUE, AND ABNORMAL STOCK RETURNS

In this research, the individual and net effects of low price, low price/earnings (P/E) ratio, and small size on the risk-adjusted excess returns are investigated for the fourth quarter of 1975 to the fourth quarter of 1985. The entire sample is divided into quintiles, and the resulting portfolios are rebalanced at the end of each quarter. Low price, low P/E ratio, and small value portfolios did experience greater excess returns. By applying the experimental control technique, the net effect of stock price is significant after controlling the size. Similarly, the net effect of the market value is significant after the stock price is controlled. The net effect of the P/E ratio is insignificant after controlling either the stock price or the market value.     

THE RELATIONSHIP BETWEEN EARNINGS YIELD AND MARKET VALUE: EVIDENCE FROM THE AMERICAN STOCK EXCHANGE

This paper provides new evidence on the empirical anomalies known as the earnings/price (E/P) effect and the size effect in the pricing of common stock. Previous authors have arrived at contradictory conclusions regarding the existence and relative importance of the anomalies, and the intent of this paper is to help clarify the issues. An empirical method used in a previous study of these issues is replicated and applied to a new set of firms—those traded on the American Stock Exchange (AMEX). This approach assures comparability with previous results and provides a sample with different market value and E/P distributions. The results from the AMEX suggest that the size effect and the E/P effect both exist and that the size effect is predominant. These results persist even after accounting for the January effect.     

The forward E/P ratio and earnings growth

Valuation theories predict a negative relation between the earnings-to-price (E/P) ratio and future earnings growth, but prior studies have produced conflicting results. Using a growth measure that incorporates loss firms, this paper shows that the negative relation exists in the long term, but not in the short term. The results also show a U-shaped relation between the forward E/P ratio and earnings risk. Compared with high forward E/P firms which are inherently financially distressed, low forward E/P firms exhibit even higher incidence of loss and larger growth volatility in subsequent years. The wide distribution of earnings growth in the lowest forward E/P portfolio indicates that this portfolio includes not only star firms that generate the strongest earnings growth, but also firms that report the most negative earnings growth. This paper shows that the forward E/P ratio is a stronger predictor of future growth than the conventionally used trailing E/P ratio.     

ON THE FUNCTIONAL FORM OF EARNINGS AND STOCK PRICES: INTERNATIONAL EVIDENCE AND IMPLICATIONS FOR THE E/P ANOMALY

This paper examines the functional form of earnings and stock prices on US and Finnish stock markets. Although the functional specification of the components of financial ratios based on purely accounting numbers has received considerable attention, the functional form of earnings and stock prices has not been investigated carefully enough. This investigation is, however, important because of the common use of E/P ratio in financial statement analysis. The empirical evidence provided by this study indicates that the proportional relationship between earnings and stock prices is rejected in both countries. In addition, it is discovered that this deviation from proportionality is a major factor producing the so-called E/P anomaly in these two countries.     

BE/ME and E/P work better than ME/BE or P/E in regressions

Researchers often form ratios of variables to measure firm characteristics, but which ratios create the most powerful tests? For example, if we use ratios of book value of equity (BE) and market value of equity (ME), or earnings (E) and price (P), does it matter which variable appears in the denominator? Any variable in the denominator, when close to zero, creates outliers and is less likely to produce effective tests. Our tests, using data from 1972 to 2008, indicate the choice between reciprocals often produces significantly different outcomes. While ME/BE is a more commonly used control variable than BE/ME or LN(BE/ME), we find the latter two produce better results, even if the data are trimmed to mitigate the outlier problem. Similarly, using E/P generally produces better results than P/E, and while ratios with book value of assets (BA) in the numerator work better than those with it in the denominator, the difference is less pronounced than when BE or E is part of the ratio. While the focus of our empirical findings is on growth measures, the principal applies anytime a ratio has a denominator that is frequently near zero.     

Glamour among value: P/E ratios and value investor attention

The trailing-four-quarter price–earnings (P/E) ratio is the most popular fundamental value proxy. This article is the first to examine the P/E ratio as the preeminent measure of value investor attention. Trailing-four-quarter P/E ratios predict significantly greater cross-sectional variation in stock returns than lagged P/E ratios or current price-to-book (P/B) ratios. P/E strategy returns are robust to variables that proxy for fundamental risk, variables mechanically related to P/E ratios, relative trading volume, and liquidity. The role of attention is evident in return patterns across long and short portfolios, day of the week, and time since formation. Stocks with low P/E ratios exhibit an increase in total trading volume driven by small trades, an improvement in liquidity, and lower idiosyncratic volatility. These patterns are consistent with the typical trading activity of individual investors, who have the strongest attention constraints.     

剩余收益模型与股票未来回报

本文采用Hou et al.(2012)公司基本面盈余预测模型并结合剩余收益模型对上市公司的内在价值进行估计,并分析内在价值与市价比率(V/P)与股票未来回报之间的关系。我们发现基于V/P分组的投资组合,在未来一至三年规模调整的持有超额回报套利分别达到15.2%、37.9%和55.9%;在控制了市账比等因素以后,V/P对股票未来回报仍然具有显著的预测作用。本文的研究克服了以往文献中运用证券分析师盈余预测进行剩余收益模型估值的内在局限,并提供了我国资本市场背景下切实可行的基于剩余收益模型估值的投资组合策略。     

Earnings Yields,Market Values,and Stock Returns

Earlier evidence concerning the relation between stock returns and the effects of size and earnings to price ratio (E/P) is not clear-cut. This paper re-examines these two effects with (a) a substantially longer sample period, 1951–1986, (b) data that are reasonably free of survivor biases, (c) both portfolio and seemingly unrelated regression tests, and (d) an emphasis on the important differences between January and other months. Over the entire period, the earnings yield effect is significant in both January and the other eleven months. Conversely, the size effect is significantly negative only in January. We also find evidence of consistently high returns for firms of all sizes with negative earnings.     

Structural properties of the price-to-earnings and price-to-book ratios

We examine the structural properties of a firm’s price-to-earnings (P/E) and price-to-book (P/B) ratios and the relation between these two ratios. A benchmark result is obtained under the hypothesis that firms use replacement cost accounting to value their operating assets, so that the P/B ratio coincides with Tobin’s q. The firm’s P/E ratio can then be expressed as a convex combination of the P/E ratios suggested respectively by the permanent earnings model and the Gordon growth model, with the relative weight to be placed on these two endpoints determined entirely by Tobin’s q. Under current financial reporting rules, the accounting for operating assets is likely to be more conservative than replacement cost accounting. Our findings characterize how the magnitude and behavior of the P/E and P/B ratios are jointly shaped by several key variables, including both past and anticipated future growth, economic profitability, and accounting conservatism     

The Valuation Accuracy of the Price-Earnings and Price-Book Benchmark Valuation Methods

This paper evaluates the valuation accuracy of the price-earnings (P/E), the price-book (P/B) and a combined price-earnings and price-book (P/E-P/B) benchmark valuation methods. Performance of the benchmark valuation methods relies on the definition of comparable firms. In this paper, comparable firms are selected based on industry membership, size and return on equity as well as combinations of industry membership with size and with return on equity. We find that within the P/E and P/B benchmark valuation methods, the best definition of the comparable firms are based on industry membership combined with return on equity. However, only the industry membership is necessary to define the comparable firms for the combined P/E-P/B method. In sum, the results suggest that, when firm's value is unknown, the combined P/E-P/B valuation approach selecting comparable firms based on industry membership performs the best among all the approaches evaluated in this paper.We also find that the P/E benchmark valuation method performs better than the P/B benchmark valuation method and the combined method outperforms either the P/E or the P/B method. These results imply that earnings are more important than book value as a single-number firm valuator over our sample years (from 1973 to 1992) and that both earnings and book values are value relevant, one does not substitute perfectly for the other.     

THE EARNINGS-PRICE AND STANDARDIZED UNEXPECTED EARNINGS EFFECTS: ONE ANOMALY OR TWO?

In this paper prior work on earnings-price (E/P) and standardized unexpected earnings (SUE) anomalies is re-examined and extended. A relation between excess returns and E/P is tested controlling for SUE. Results suggest that both anomalies are still present in the data, and that the E/P effect exists independently of the most recent earnings surprise.     

From dividend yield to discounted cash flow: a history of UK and US equity valuation techniques

This article explores how, as capital markets developed, equity valuation methods changed. The history of equity valuation is described, from its early origins during the South Sea Bubble, through the new issue boom of the nineteenth century and the stock market booms of the 1920s and 1950s. The moves from dividend yield and asset backing, to earnings yield and then P/E ratios are chronicled. The article compares developments in the UK and the US, in particular the relative slowness of the UK market to adopt US-pioneered techniques such as the P/E ratio, the concept of value versus growth stocks, and using intrinsic value to determine whether shares are cheap or dear. The article concludes with a discussion of the relatively slow introduction of the dividend discount model and of discounted cash flow as equity valuation tools on both sides of the Atlantic.     

When Is Bad News Really Bad News?

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P/E and the average market P/E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market.     

Accruals Management to Avoid Losses

This study examines whether firms engage in accruals management to beat the zero earnings benchmark from the perspective of earnings per share (EPS). Based on net income scaled by lagged market value of equity (E/MV) to define just‐miss and just‐beat test bins, previous studies provide no or inconclusive evidence of accruals management to beat the zero earnings benchmark. I conjecture that because managers focus on shares scaled earnings performance rather than market value scaled earnings performance, forming test bins based on EPS instead of E/MV is a better approach to detect accruals management. As expected, I find evidence of accruals management to beat the zero EPS benchmark. I also find that firms are more likely to manipulate accruals when managers have stronger incentives to beat the zero EPS benchmark. In addition, accruals of firms just beating the zero EPS benchmark are more likely to reverse the next year, resulting in relatively lower future earnings for firms just beating the benchmark compared with firms just missing the benchmark.     

THE RELATIONSHIP BETWEEN SECURITIES YIELDS, FIRM SIZE, EARNINGS/PRICE RATIOS AND TOBIN'Sq

Several studies in financial economics have found a positive relationship between stock returns and firm size. This relationship persists even after controlling for various measures of risk. There is also a well documented inverse relationship between stock returns and the Price/Earnings (P/E) ratio. However, there is still substantial controversy whether the size effect subsumes the P/E effect or vice versa. In this paper, we demonstrate that neither the size nor the P/E effect subsumes the other. We introduce Tobin's q as a variable that is closely related to stock returns as well as to both the size and P/E effects and show that the size effect persists after controlling for both P/E and q , while the P/E effect becomes much smaller after controlling for size and q . This leads us to conclude that the size effect is more robust to additional controls such as Tobin's q than the P/E effect. Finally, the size effect is almost entirely a January phenomenon whereas the P/E effect is a non-January effect.     

Measuring the Contributions of Brand to Shareholder Value (and How to Maintain or Increase Them)

Since 1993 Young & Rubicam has invested over $130 million in collecting and interpreting data on consumers' perceptions of some 44,000 product and service brands in over 50 countries. At the core of Y&R's research effort is the Brand‐Asset® Valuator (or “BAV”), a model that converts the firm's hoard of data on global consumer perceptions and behavior patterns into assessments of brand strength and value. When combined with the findings of independent research by academics in marketing and finance (using Compustat data on corporate operating and stock‐price performance), the BAV's assessments of brand values can be used to quantify the contributions of brands to both corporate earnings and market values. One of the main findings of this research is that brands contribute to the market value of companies by increasing not only current earnings, but the price‐to‐earnings (P/E) multiples that investors assign to current earnings. Such increases in P/E multiples in turn reflect investors' expectations for lower risk, higher growth or both. At the same time, more recent consumer surveys (conducted in 2005‐2007) provided indications of brand “erosion” even as the markets were pushing up share prices, presumably with the expectation that intangibles like brand would continue to drive operating earnings in the future. For the leaders of consumer‐related corporations, the resulting “disconnect” between stock prices and brand values points to a continuing challenge for brand management. Building brand value is important for both finance professionals trying to increase shareholder value and marketers trying to build brand strength and increase sales and margin. The aim of the authors' research is to bring these two groups—finance and marketing— closer together by demonstrating the role of marketing strategy and brand equity in driving shareholder value.     

Audit committee financial expertise,gender, and earnings management: Does gender of the financial expert matter?

The effectiveness of the presence of financial expertise on the audit committee (AC) in reducing earnings management has been the subject of many previous studies with mixed findings. This paper suggests that the mixed findings may be due to prior studies not distinguishing between the genders of the financial experts on the AC. We investigate how financial expertise affects earnings management taking into account the gender of the financial expert. We use the data of a sample of 5660 US firm-year observations from 2007 to 2013 which was analysed using least squares regressions clustering by firm. The results indicate that proportion of financial expertise on the AC and gender reduces earnings management. We then group the AC financial experts by gender, and examine whether the gender of the financial expert matters. The results show that the proportion of female financial experts on the AC is significantly associated with less earnings management while the proportion of male financial experts does not significantly affect earnings management; this suggests that previous studies indicating that the presence of a financial expert on the AC may have been influenced by gender of the female financial experts. Further, our findings may also partly explain the contradictory findings of prior studies on the effect of financial expertise on the ACs effectivness.     

Analysts Earnings Forecasts and the Roles of Earnings and Book Value in Equity Valuation

This study examines the effect of the degree of association between current earnings and expected future earnings on the relative importance of earnings and book value for explaining equity price. Consensus analysts forecasts of one-year-ahead earnings are used to proxy for expected future earnings and are compared to reported current earnings to measure the degree of the association. We find that the value-relevance of current earnings negatively correlates with the extent to which consensus analysts forecasts deviate from current earnings. We also find that the incremental explanatory power of book value for equity price positively correlates with this measure. These results remain robust after controlling for factors known to be affecting the value-relevance of earnings such as negative earnings and the earnings-to-book ratio. Our results also show that this analysts' forecast-based measure of `earnings persistence' dominates historical earnings variance in explaining cross-sectional variations in the value-relevance of earnings and book value.