Modelling the cross-sectional variation of e/p ratios: Implications for the e/p anomaly

Teppo Martikainen, A. Gunasekaran

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Abstract

This paper models the cross-sectional variation of earnings-price (E/P) ratios using Finnish data. Although E/P ratios are very commonly used in practical investment decisions, the cross-sectional determinants of E/P ratios have reached only limited attention so far. In this paper it is shown that a substantial part of the cross-sectional variation of Finnish E/P ratios can be devoted to differences in securities systematic risk estimated by instrumental accounting variables, such as accounting betas, financial leverage, operating leverage and growth. After controlling the E/P ratios for the effects of these instrumental risk variables, the E/P anomaly becomes insignificant in the Finnish stock market. This finding suggests that the E/P anomaly generally observed in major financial markets may be largely due to the serious empirical problems in risk estimation.

Original languageEnglish (US)
Pages (from-to)1899-1909
Number of pages11
JournalInternational Journal of Systems Science
Volume25
Issue number11
DOIs
StatePublished - Nov 1994

All Science Journal Classification (ASJC) codes

  • Control and Systems Engineering
  • Theoretical Computer Science
  • Computer Science Applications

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