TY  - JOUR
AB  - Purpose– The purpose of this paper is to investigate the dynamic effect of Tobin's q ratio on price-to-earnings (PE) ratio. Design/methodology/approach– The objective of this study is to investigate the dynamic effect of Tobin's q on PE ratio. To achieve this objective, a vector autoregressive analysis (Equation (1)) is employed to analyze the quarterly data from 1951Q4 to 2012Q4 to determine the generalized impulse response functions and perform the variance decomposition of Tobin's q ratio on PE ratio. The Granger causality Wald test is performed to determine if Tobin's q ratio causes PE ratio and vice versa. Findings– Based on the analysis of the quarterly market-level data from 1951Q4 to 2012Q4, the results show that PE ratio significantly drops immediately following the shock to the change in Tobin's q ratio. The results from the Granger-causality test indicate that Tobin's q ratio change causes PE ratio to drop. There is not a reverse causation from PE ratio to Tobin's q ratio change. The variance decomposition results reveal that Tobin's q ratio change forecasts about 67.53 to 67.78 percent of PE ratio at the two-quarter to eight-quarter horizons. Originality/value– Up to this point, there is not a single study in the literature investigating the relationship between Tobin's q and PE ratios. Consequently, the current study is set up to investigate the dynamic effect of Tobin's q ratio on PE ratio. A major contribution of this study is to provide empirical evidence of the dynamic effect of Tobin's q ratio on PE ratio.
VL  - 40
IS  - 6
SN  - 0307-4358
DO  - 10.1108/MF-07-2013-0193
UR  - https://doi.org/10.1108/MF-07-2013-0193
AU  - Sum Vichet
PY  - 2014
Y1  - 2014/01/01
TI  - Dynamic effect of Tobin's Q on price-to-earnings ratio
T2  - Managerial Finance
PB  - Emerald Group Publishing Limited
SP  - 634
EP  - 643
Y2  - 2024/04/25
ER  -