| Popis: |
This study reexamines the relationship between firm’s forward PE ratio and the expected earnings growth rate under the theoretical frame work of the AEG model (Ohlson and Juettner-Nauroth (2005)). After controlling the cost of capital, this study identifies a positive correlation between the PE ratio and the firm’s short-term expected earnings growth rate. This is contrary to previous conflicting findings about the relationship between these two variables. In addition, test shows that for firms with the same cost of capital and short-term earnings growth rate, the higher the long-term abnormal earnings growth rate, the higher the PE ratio. Moreover, for those firm observations with a short-term earnings growth rate equal or close to the firm’s cost of capital, the positive correlation between PE and short-term earnings growth rate is reversed and becomes negative, consistent with the conclusion from the theoretical model. Lastly, the results from the multivariable regression analysis indicate that there are several interaction relationships among variables: a significant and negative correlation between the PE ratio and cost of capital, a significant and negative correlation between the PE ratio and the difference between the cost of capital and long-term abnormal earnings growth rate, and a significant and positive correlation between the PE ratio and the difference between the firm’s short-term earnings growth rate and long-term abnormal earnings growth rate. |
