Research

P/E Changes: Some New Results

The P/E ratio is often used as a metric to compare individual stocks and the market as a whole relative to historical valuations. We examine the factors that affect changes in the inverse of the P/E ratio (E/P) over time in the broad market (S&P 500 Index). Our model includes variables that measure investor beliefs and changes in tax rates and shows that these variables are important factors affecting the P/E ratio. We extend prior work by correcting for the presence of a long-run relation between variables included in the model. As frequently conjectured, changes in the P/E ratio have predictive power. Our model explains a large portion of the variation in E/P and accurately predicts the future direction of E/P, particularly when predicted changes in E/P are large or provide a consistent signal over more than one quarter.

Publication Information
Article Title: P/E Changes: Some New Results
Journal: Journal of Forecasting (Dec, 2008)
Author(s): Zorn, Thomas S;  Dudney, Donna;  Jirasakuldech, Benjamas
Researcher Information
    
Zorn, Thomas S
Zorn, Thomas S
Emeritus
Expertise:
  • Corporate Finance
  • Financial Markets & Investing
  • Real Estate
  • Managerial Economics
  • Interest Rates & Risk Management
Finance
CoB 423
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-2330
Fax:
tzorn1@unl.edu
Dudney, Donna
Dudney, Donna
Associate Dean of Undergraduate Curriculum and Programs
Expertise:
  • Financial Institutions
  • Financial Markets & Investing
  • Managerial Economics
Finance
CoB 301 G
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-5695
Fax: (402) 472-5180
ddudney@unl.edu