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I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics-viz., the PEG ratio and the PE ratio. Proponents of the PEG ratio (which is the price-earnings [PE] ratio divided by the short-term earnings growth rate) argue that this ratio takes account of differences in short-run earnings growth, providing a ranking that is superior to the ranking based on PE ratios. But even though the PEG ratio may provide an improvement over the PE ratio, it is arguably still too simplistic because it implicitly assumes that the short-run growth forecast also captures the long-run future. I provide a means of simultaneously estimating the expected rate of return and the rate of change in abnormal growth in earnings beyond the (short) forecast horizon-thereby refining the PEG ratio ranking. The method may also be used by researchers interested in determining the effects of various factors (such as disclosure quality, cross-listing, etc.) on the cost of equity capital. Although the correlation between the refined estimates and estimates of the expected rate of return implied by the PEG ratio is high, supporting the use of the PEG ratio as a parsimonious way to rank stocks, the estimates of the expected rate of return based on the PEG ratio are biased downward. This correlation is much lower and the downward bias is much larger for estimates of the expected rate of return based on the PE ratio. I provide evidence that stocks for which the downward bias is higher can be identified a priori.

Stock markets and politics are enduring staples of dinner party conversations but surprisingly little is known about the interaction between the two. Here we present evidence for a robust relationship between a key financial measure—the aggregate Price–Earnings ratio—and surveyed approval of the incumbent president. We argue, following the finance literature, that the price–earnings ratio is a composite measure of investors’ hopes and fears. The partially prospective nature of this ratio enables us to shed new light upon the controversy surrounding how the electorate attends to economic circumstances in judging its presidents.

ABSTRACT The market price-earnings ratios differ from those of each share. Despite allowing for several pertinent analyses, authors have rarely addressed these valuation ratios in the Brazilian context. We can use it to evaluate whether the stock market is overvalued (undervalued). In this article, we analyze the mean reversion in a price-earnings ratio based on Ibovespa and identify periods of overvaluation (undervaluation) in the Brazilian stock market. We considered the period from December 2004 to June 2018. Until then, there are no studies that sought to identify periods of overvaluation (undervaluation) in this market. In the analyses, we used non-linear econometric methods. We analyzed the mean reversion in the price-earnings ratio using a unit root test that incorporates a Fourier function in the deterministic term. We identified the periods of market overvaluation (undervaluation) through the regime probabilities obtained from a Markov Switching model, estimated with the price-earnings ratio. The results evidenced that the price-earnings ratio based on the Ibovespa has a non-linear trend and exhibits mean reversion. Thus, this valuation ratio should provide information on the future stock market returns, mostly when it is very dispersed in relation to historical standards. We identified four periods of market overvaluation interposed with five periods of market undervaluation. Mean reversion in the price-earnings ratio contraposes the Efficient Markets Hypothesis. There are no other applications of unit root tests with a Fourier function in the Brazilian context. Furthermore, adopting a Markov Switching model to identify periods of market overvaluation (undervaluation) consists of a methodological contribution. Investors can take advantage of the identification of these periods to establish investment strategies. RESUMO Os índices preço-lucro de mercado diferem daqueles de cada ação. Apesar de possibilitarem várias análises pertinentes, raramente, esses índices foram abordados no contexto brasileiro. Eles podem ser utilizados para avaliar uma sub/sobrevalorização do mercado de ações. Este estudo objetivou analisar a reversão à média em um índice preço-lucro baseado no Ibovespa, assim como, utilizando dele, identificar momentos de sub/sobrevalorização do mercado de ações brasileiro. O período considerado foi de dezembro de 2004 a junho de 2018. Até então, não havia estudos que identificassem momentos de sub/sobrevalorização desse mercado. Nas análises, foram adotados métodos econométricos não lineares. A reversão a média do índice preço-lucro foi analisada mediante um teste de raiz unitária que incorpora uma função Fourier no termo determinístico. Os momentos de sub/sobrevalorização foram identificados por meio das probabilidades de regime, recuperadas de um modelo Markov Switching estimado com o índice preço-lucro. Os resultados evidenciaram que o índice preço-lucro baseado no Ibovespa tem uma tendência não linear e apresenta reversão à média. Assim, sobretudo, em momentos nos quais esse múltiplo se encontrar notavelmente disperso para os padrões históricos, ele deve prover informação sobre o comportamento futuro do mercado de ações. Foram identificados quatro momentos de mercado sobrevalorizado, intercalando com cinco momentos de mercado subvalorizado. A reversão à média do índice preço-lucro contrapõe a Hipótese de Mercados Eficientes. Não foram encontradas outras aplicações de testes de raiz unitária com função Fourier no contexto brasileiro. Além disso, adotar um modelo de Markov Switching para identificar momentos de sub/sobrevalorização no mercado de ações consiste em uma contribuição metodológica. Investidores podem tirar proveito da identificação desses momentos para estabelecer estratégias de investimento.

Information asymmetry is an important problem of financial markets, which creates unequal conditions for different investors. The aim of the research is to analyse the impact of the implementation of International Financial Reporting Standards (IFRS) on the change in the relationship between a number of financial indicators and the company’s market value. The latter was taken as an indicator of information asymmetry arising from investors’ speculative expectations. The research employs methods of correlation, regression, and comparative analysis. The study established an increase in the correlation between Price-to-Earnings (P/E) ratio and market capitalization (Market cap) for a sample of Saudi Arabian companies after the IFRS implementation. However, the previously obtained conclusions were not confirmed after checking the results with the data of each individual company. Moreover, it was found that for most companies the correlation between P/E ratio and Market cap significantly weakened after the IFRS implementation. It can be assumed that before the mandatory IFRS implementation, the increase in Market cap could occur mainly on the basis of investors’ expectations. However, expectations could not be met because of a significant level of information asymmetry. Therefore, the decrease in correlations between P/E ratio and Market cap may indicate a more critical assessment of companies by investors due to increased transparency of financial information. Further research may focus on the analysis of other factors influencing the level of information asymmetry, such as improving the quality of integrated reporting and corporate governance.  

In the early 1990s, Anthony Fielding coined the term 'escalator region' to describe how London and the South East attracted those with greater human capital by offering them superior career prospects and enhanced returns in the housing markets. When delineating a housing or labour market area, it is not uncommon to require high levels of migration and commuting within the market area relative to those that cross the area's boundaries. Net migration flows to and from this escalator region change depending on the age range one examines, making migration across boundaries relatively high. It is proposed that focusing on age ranges that reflect younger adults would capture the extent of the market. In particular, the birth of a first child is likely to trigger migration, but that movement is constrained to be within the boundary of the market area. The decision to buy a dwelling would be made around the time of this event. This paper delineates market areas using spatial autocorrelation. This has the advantage of using a statistical criterion rather than a containment value. Broadly similar areas in the Greater South East are revealed using relative housing affordability measures, the movement of infants and the migration of 20- to 24-year-olds. It is argued that the time-varying patterns of migration of 30- to 39-year-olds is reflective of a change in housing affordability, forcing more households to migrate with children whilst renting.

Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price-dividend and price-earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short-term, rather than long-term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.

Purpose The purpose of this paper is to investigate the empirical effects of modifying the calculation of the diluted earnings per share (EPS) number in an international compared to the US accounting setting. The diluted EPS calculation originated in the US Accounting Principles Board Opinion No. 15 (APB 15) and continues in both the US Statement of Financial Accounting Standard No. 128 (SFAS 128), EPS and International Accounting Standard 33 (IAS 33) EPS. Our analysis of the treatment of dilutive warrants and options versus other dilutive convertible securities extends the work of McEnroe and Sullivan (2018), hereafter referred to as McEnroe and Sullivan, 2018 and provides more insight into the impact on the international accounting regulatory environment. Using the McEnroe and Sullivan, 2018 proposed alternative EPS model, we investigate revising the EPS model and analyzing the impact on international data observations. Design/methodology/approach The authors selected our sample from the Compustat Fundamentals Annual Database – North America Daily file. Although using the Global – Daily file would be ideal, the data the authors need to make the alternative EPS calculations is not available in the Global database. The authors pulled data for the years 2010 through 2016 for both the USA and international companies. The authors eliminated companies based upon the criteria described later in the paper (which is comparable to the data restrictions set in McEnroe and Sullivan, 2018). Findings The results are comparable to the results of the US study. The authors find an average increase in diluted EPS to be 4.57 per cent and the median increase to be 2.43 per cent. McEnroe and Sullivan, 2018 found the average increase in diluted EPS to be 5.72 per cent and the median increase to be 3.81 per cent. The authors do not find a significant difference in the overall average percentage increase when looking across all of the years in the data set and comparing the USA to international observations. Overall, the authors further extend the previous conclusion of McEnroe and Sullivan, 2018 that both the USA and international standard setters should consider the alternative diluted EPS model for accounting regulation. Research limitations/implications The study consists of a sample of 262 international firms. An extended study, of all firms subject to International Accounting Reporting Standards (IFRS) might be used by the International Accounting Standards Board and then stratified by country to see if the capital structure of a particular nation’s securities is particularly impacted by the results. Practical implications As McEnroe and Sullivan, 2018, p. 499 state, the Financial Accounting Standards Board (FASB) avers that the price-earnings ratio of an equity is perhaps the most frequently cited business statistic in equity analysis. The authors cite one source Kuepper, (2018), that it is “one of the most popular metrics” on the international level of stocks using IFRS. Given that the denominator, in the price-earnings ratio is the focus of our study, as in the case McEnroe and Sullivan, 2018, the results have implications for the further study and revision of IAS 33. Social implications Again, as in the case of McEnroe and Sullivan, 2018, if currently reported diluted EPS results in lower equity prices than under the proposed model, an effect might be higher debt and equity costs. Since the authors are unaware of any rationale for the current treatment, the authors feel that the current formulation is less than optimal and that the issue of its provisions should be examined. Originality/value A review of the literature found no other study other than McEnroe and Sullivan, 2018 undertaking the issue.

Purpose A large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern that stock valuation is also driven by investor sentiment. This paper aims to extend the existing literature by exploring whether investor sentiment impacts the P/E ratio. Design/methodology/approach The paper examines the determinants of P/E ratio by applying latent variable models with investor sentiment as a latent variable and several fundamental factors as control variables. Investor sentiment is proxied by trading volume, advance-decline ratio and price volatility. Findings Using annual data of the US industries over the period of 1998-2014, the current paper produces new empirical evidence that investor sentiment significantly affects the P/E ratio. This result is robust to the inclusion of several control variables that have been documented to explain the P/E ratio. Practical implications The findings have important implications for investors, as downplaying sentiment can lead to significant errors in making equity investment choices based on the P/E ratio. Originality/value The analytical framework of the current paper is differentiated from the conventional analysis in which the P/E ratio is regressed against control variables and proxies for sentiment, thus falling into the trap of implicitly presupposing that proxies are perfect measures of investor sentiment. As all proxies may have measurement errors to the true but unobservable investor sentiment, the current paper uses latent variable models to shed new light on the influence of investor sentiment on the P/E ratio.

A debate about whether firms with superior customer satisfaction earn superior stock returns has been persistent in the literature. Using 15 years of audited returns, the authors find convincing empirical evidence that stock returns on customer satisfaction do beat the market. The recorded cumulative returns were 518% over the years studied (2000-2014), compared with a 31% increase for the S&P 500. Similar results using back-tested instead of real returns were found in the United Kingdom. The effect of customer satisfaction on stock price is, at least in part, channeled through earnings surprises. Consistent with theory, customer satisfaction has an effect on earnings themselves. In addition, the authors examine the effect of stock returns from earnings on stock returns from customer satisfaction. If earnings returns are included among the risk factors in the asset pricing model, the earnings variable partially mitigates the returns on customer satisfaction. Because of the long time series, it is also possible to examine time periods when customer satisfaction returns were below market. The reversal of the general trend largely resulted from short-term market idiosyncrasies with little or no support from fundamentals. Such irregularities have been infrequent and eventually self-correcting. The authors provide reasons why irregularities may occur from time to time.