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AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE

Year 2010, Volume: 2 Issue: 1, 15 - 23, 01.06.2010

Abstract

The price to earnings ratio (P/E) is widely used, particularly by practitioners, as a measure of
relative stock valuation. Price to earnings is an indicator which indicates current mood of
investors how much they are willing to pay per unit of company earnings. Traditionally, the P/E
ratio has been assumed to be an indicator of the quality of an investment; a relatively low P/E
ratio implies a good investment, whereas a relatively high P/E ratio indicates a “poor” investment
prospect.
The aim of this study is to identify relationship among market stock return, dividend yields and
price to earnings ratio affect in the period 2000.01-2009.12. Therefore, to determine long-run
and short-run relationship, Johansen cointegration tests, error-correction models and Granger
causality tests are used.

References

  • Anderson K. and Brooks C. (2005), “Decomposing the Price-Earnings Ratio”, Journal of Asset Management, 6 (3), pp. 456-469.
  • Aydoğan K. and Gürsoy G. (2000), “P/E and Price-to-Book Ratios as Predictors of Stock Returns in Emerging Equity Markets”, Emerging Markets Quarterly, 4 (4), pp.60-67.
  • Basu S. (1975), “The Information Content of Price-Earnings Ratios”, Financial Management, 4 (2), pp. 53-64.
  • Basu S. (1977), “Investment Performance of Common Stocks in Relation to Their Price- Earnings
  • Ratios: A Test of the Efficient Market Hypothesis”, The Journal of Finance, 32 (3), pp.663-682. Basu S. (1983), “The Relationship Between Earnings Yield, Market Value, and Return for NYSE
  • Common Stocks: Further Evidence”, Journal of Financial Economics, 12 (4), pp. 129-156. Beaver W. and Morse D. (1978), “What Determines Price-Earnings Ratios?”, Financial Analysts Journal, 34 (4), pp. 65-76.
  • Banz and Rolf W. (1981), “The Relationship Between Return and Market Value Stocks”. Journal of Financial Economics, 9 (1), pp.3-18.
  • Banz R.W. and Breen W. (1986), “Sample-Dependent Results Using Accounting and Market
  • Data: Some Evidence”, The Journal of Finance 41(2), 1986, pp. 779-793.
  • Bremer, M. and Sweeney R. J. (1991), “The Reversal of Large Stock Price Decreases”, Journal of Finance, 46 (3), pp.747-54.
  • Campbell J.Y. and Shiller, R. R. (1988), “The Dividend-Price Ratio and Expectations of Future
  • Dividends and Discount Factors”, Review of Financial Studies, 1 (3), pp.195-228. Campbell J. Y. and Shiller R. R. (2001), “Valuation Ratios and the Long-Run Stock Market
  • Outlook: An Update”, NBER Working Paper, No: 8221.
  • Carlson J. B., Pelz E. A. and Wohar M.E. (2002), “Will Valuation Ratio Revert to Historical
  • Means?”, Journal of Portfolio Management, 28 (4), pp. 23-36. Damodaran A. (2002), Investment Valuation: Tools and Techniques for Determining the Value of
  • Any Asset, John-Wiley & Sons Inc., New York. Dudney D., Jirasakuldech B. and Zorn T. (2001), “Do Residual Earnings Price Ratios Explain
  • Cross-Sectional Variations in Stock Returns?”, http://69.175.2.130/~finman/Reno/Papers/residualepratiosfma009.pdf, [ Accessed 16.05.2010].
  • Elfakhani S. (1994), “Portfolio Performance and the Interaction between Systematic Risk, Firm
  • Size and Price-Earnings Ratio: The Canadian Evidence”, Review of Financial Economics, 3 (2), pp. 51-70. Fama E. and French K. (1988), “Dividends Yields and Expected Stock Returns”, Journal of
  • Financial Economics, 22 (2), pp. 3-25. Fama E. and French K. (1992), “The Cross-Section Of Expected Stock Returns”, Journal of Finance, 47 (3), pp. 427-465.
  • Fairfield P. M. (1994), “P/E, P/B and the Present Value of Future Dividends”, Financial Analysts Journal, 50 (4), pp. 23-32.
  • Fuller R. L. and Levinson M. (1993), “Returns to E/P Strategies, Higgledy-Piggledy Growth,
  • Analysts’ Forecast Errors, and Omitted Risk Factors”, Journal of Portfolio Management, 19 (2), 34. Gordon M. J. (1962), “The Savings Investment and Valuation of a Corporation”, The Review of
  • Economics and Statistics, 44 (1), pp. 37-51. Goodman, D.A. and J.W. Peavy, 1983. “Industry Relative Price-Earning Ratios as Indicators of
  • Investment Returns”, Financial Analysts Journal, 39 (2), pp.60-64. Goodman, D.A. and J.W. Peavy , “The Interaction of Firm Size and Price-Earnings Ratio on Portfolio Performance”, Financial Analysts Journal 42 (3), 1986, pp. 9-12.
  • Gompers P. A, Ishii L. J. and Metrick A. (2003), “Corporate Governance & Equity Prices”,
  • Quarterly Journal Of Economics, 118 (1), pp.107-158. Hossein A. (2007), “A Quantitative Study of the P/E Ratio on the Swedish Market”, http://www.essays.se/essay/e5d01fd033/ ,[ Accessed 12.02.2010].
  • Jaffe J., Keim D. and Westerfield R. (1989), “Earnings, Yields, Market Values and Stock
  • Returns”, Journal of Finance, 44 (1), pp. 135-148. Jain P. and Rosett J. (2001), “Macroeconomic Variables and the E/P Ratio”, Working paper, http://ssrn.com/abstract=294533 , [ Accessed 15.05.2010].
  • Lakonishok J., Shleifer A. and Vishny R. (1994), “Contrarian Investment, Extrapolations, and Risk”, Journal of Finance, 49 (5), pp. 1541-1578.
  • Levy H. and Lerman Z. (1985), “Testing P/E Filters by Stochastic Dominance Rules”, Journal
  • Portfolio Management, 11 (2), pp. 31–40. Loughlin J. (1997), “Effects of Increased Volatility in Determinants of the P/E Multiple of the Standard & Poor’s 500 Common Stock Index”, http://jcsb.slu.edu/faculty/loughljj/loughljj.pdf ,[ Accessed 21.05.2010].
  • Park Y. S. and Lee J. (2003), “An Empirical Study on the Relevance of Applying Relative
  • Valuation Models to Investment Strategies in the Japanese Stock Market” , Japan and World Economy, 15 (3), pp.331-339. Poterba, J. and Summers L. (1988), “Mean Reversion in Stock Prices: Evidence and Implications”, Journal of Financial Economics, 22 (2), pp.27-59.
  • Nickolson S. F. (1960) , “Price Earning Ratio”, Financial Analysts Journal, 16 (4), pp.43-45.
  • Ramcharran H. (2002), “An Empirical Analysis of the Determinants of the P/E Ratio in Emerging
  • Markets” , Emerging Markets Review, 3 (4), pp. 165-178. White C. B. (2000), “What P/E Will the U.S. Stock Market Support?”, Financial Analysts Journal, (6), pp. 30-38.
Year 2010, Volume: 2 Issue: 1, 15 - 23, 01.06.2010

Abstract

References

  • Anderson K. and Brooks C. (2005), “Decomposing the Price-Earnings Ratio”, Journal of Asset Management, 6 (3), pp. 456-469.
  • Aydoğan K. and Gürsoy G. (2000), “P/E and Price-to-Book Ratios as Predictors of Stock Returns in Emerging Equity Markets”, Emerging Markets Quarterly, 4 (4), pp.60-67.
  • Basu S. (1975), “The Information Content of Price-Earnings Ratios”, Financial Management, 4 (2), pp. 53-64.
  • Basu S. (1977), “Investment Performance of Common Stocks in Relation to Their Price- Earnings
  • Ratios: A Test of the Efficient Market Hypothesis”, The Journal of Finance, 32 (3), pp.663-682. Basu S. (1983), “The Relationship Between Earnings Yield, Market Value, and Return for NYSE
  • Common Stocks: Further Evidence”, Journal of Financial Economics, 12 (4), pp. 129-156. Beaver W. and Morse D. (1978), “What Determines Price-Earnings Ratios?”, Financial Analysts Journal, 34 (4), pp. 65-76.
  • Banz and Rolf W. (1981), “The Relationship Between Return and Market Value Stocks”. Journal of Financial Economics, 9 (1), pp.3-18.
  • Banz R.W. and Breen W. (1986), “Sample-Dependent Results Using Accounting and Market
  • Data: Some Evidence”, The Journal of Finance 41(2), 1986, pp. 779-793.
  • Bremer, M. and Sweeney R. J. (1991), “The Reversal of Large Stock Price Decreases”, Journal of Finance, 46 (3), pp.747-54.
  • Campbell J.Y. and Shiller, R. R. (1988), “The Dividend-Price Ratio and Expectations of Future
  • Dividends and Discount Factors”, Review of Financial Studies, 1 (3), pp.195-228. Campbell J. Y. and Shiller R. R. (2001), “Valuation Ratios and the Long-Run Stock Market
  • Outlook: An Update”, NBER Working Paper, No: 8221.
  • Carlson J. B., Pelz E. A. and Wohar M.E. (2002), “Will Valuation Ratio Revert to Historical
  • Means?”, Journal of Portfolio Management, 28 (4), pp. 23-36. Damodaran A. (2002), Investment Valuation: Tools and Techniques for Determining the Value of
  • Any Asset, John-Wiley & Sons Inc., New York. Dudney D., Jirasakuldech B. and Zorn T. (2001), “Do Residual Earnings Price Ratios Explain
  • Cross-Sectional Variations in Stock Returns?”, http://69.175.2.130/~finman/Reno/Papers/residualepratiosfma009.pdf, [ Accessed 16.05.2010].
  • Elfakhani S. (1994), “Portfolio Performance and the Interaction between Systematic Risk, Firm
  • Size and Price-Earnings Ratio: The Canadian Evidence”, Review of Financial Economics, 3 (2), pp. 51-70. Fama E. and French K. (1988), “Dividends Yields and Expected Stock Returns”, Journal of
  • Financial Economics, 22 (2), pp. 3-25. Fama E. and French K. (1992), “The Cross-Section Of Expected Stock Returns”, Journal of Finance, 47 (3), pp. 427-465.
  • Fairfield P. M. (1994), “P/E, P/B and the Present Value of Future Dividends”, Financial Analysts Journal, 50 (4), pp. 23-32.
  • Fuller R. L. and Levinson M. (1993), “Returns to E/P Strategies, Higgledy-Piggledy Growth,
  • Analysts’ Forecast Errors, and Omitted Risk Factors”, Journal of Portfolio Management, 19 (2), 34. Gordon M. J. (1962), “The Savings Investment and Valuation of a Corporation”, The Review of
  • Economics and Statistics, 44 (1), pp. 37-51. Goodman, D.A. and J.W. Peavy, 1983. “Industry Relative Price-Earning Ratios as Indicators of
  • Investment Returns”, Financial Analysts Journal, 39 (2), pp.60-64. Goodman, D.A. and J.W. Peavy , “The Interaction of Firm Size and Price-Earnings Ratio on Portfolio Performance”, Financial Analysts Journal 42 (3), 1986, pp. 9-12.
  • Gompers P. A, Ishii L. J. and Metrick A. (2003), “Corporate Governance & Equity Prices”,
  • Quarterly Journal Of Economics, 118 (1), pp.107-158. Hossein A. (2007), “A Quantitative Study of the P/E Ratio on the Swedish Market”, http://www.essays.se/essay/e5d01fd033/ ,[ Accessed 12.02.2010].
  • Jaffe J., Keim D. and Westerfield R. (1989), “Earnings, Yields, Market Values and Stock
  • Returns”, Journal of Finance, 44 (1), pp. 135-148. Jain P. and Rosett J. (2001), “Macroeconomic Variables and the E/P Ratio”, Working paper, http://ssrn.com/abstract=294533 , [ Accessed 15.05.2010].
  • Lakonishok J., Shleifer A. and Vishny R. (1994), “Contrarian Investment, Extrapolations, and Risk”, Journal of Finance, 49 (5), pp. 1541-1578.
  • Levy H. and Lerman Z. (1985), “Testing P/E Filters by Stochastic Dominance Rules”, Journal
  • Portfolio Management, 11 (2), pp. 31–40. Loughlin J. (1997), “Effects of Increased Volatility in Determinants of the P/E Multiple of the Standard & Poor’s 500 Common Stock Index”, http://jcsb.slu.edu/faculty/loughljj/loughljj.pdf ,[ Accessed 21.05.2010].
  • Park Y. S. and Lee J. (2003), “An Empirical Study on the Relevance of Applying Relative
  • Valuation Models to Investment Strategies in the Japanese Stock Market” , Japan and World Economy, 15 (3), pp.331-339. Poterba, J. and Summers L. (1988), “Mean Reversion in Stock Prices: Evidence and Implications”, Journal of Financial Economics, 22 (2), pp.27-59.
  • Nickolson S. F. (1960) , “Price Earning Ratio”, Financial Analysts Journal, 16 (4), pp.43-45.
  • Ramcharran H. (2002), “An Empirical Analysis of the Determinants of the P/E Ratio in Emerging
  • Markets” , Emerging Markets Review, 3 (4), pp. 165-178. White C. B. (2000), “What P/E Will the U.S. Stock Market Support?”, Financial Analysts Journal, (6), pp. 30-38.
There are 37 citations in total.

Details

Other ID JA43CS46KZ
Journal Section Articles
Authors

Funda H. Sezgın This is me

Publication Date June 1, 2010
Published in Issue Year 2010 Volume: 2 Issue: 1

Cite

APA Sezgın, F. H. (2010). AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE. International Journal of Economics and Finance Studies, 2(1), 15-23.
AMA Sezgın FH. AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE. IJEFS. June 2010;2(1):15-23.
Chicago Sezgın, Funda H. “AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE”. International Journal of Economics and Finance Studies 2, no. 1 (June 2010): 15-23.
EndNote Sezgın FH (June 1, 2010) AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE. International Journal of Economics and Finance Studies 2 1 15–23.
IEEE F. H. Sezgın, “AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE”, IJEFS, vol. 2, no. 1, pp. 15–23, 2010.
ISNAD Sezgın, Funda H. “AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE”. International Journal of Economics and Finance Studies 2/1 (June 2010), 15-23.
JAMA Sezgın FH. AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE. IJEFS. 2010;2:15–23.
MLA Sezgın, Funda H. “AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE”. International Journal of Economics and Finance Studies, vol. 2, no. 1, 2010, pp. 15-23.
Vancouver Sezgın FH. AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE. IJEFS. 2010;2(1):15-23.