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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.

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.

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.

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.

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.

This paper aims to examine the conditional and nonlinear relationship between price-earnings (P/E) ratio and payout ratio. A common finding of previous studies using linear regression model is that the P/E ratio is positively related to the dividend payout ratio. However, none of them investigates the condition under which the positive relationship holds.

This paper uses the fixed effects model to investigate the conditional and nonlinear relationship between P/E ratio and payout ratio. With the inclusion of fundamental factors and investor sentiment, this model allows for nonlinear relationship to be conditioned on the return on equity and the required rate of return.

Based on the annual data of industries in the USA over the period of 1998-2014, this paper produces new evidence indicating that when the return on equity is greater (less) than the required rate of return, the P/E ratio and dividend payout ratio exhibit a negative (positive) relationship and positive (negative) convexity.

Due to the curvature relationship between P/E ratio and payout ratio, the corporate managers and stock investors should pay more attention to the reduction in payout ratio than the rising payout ratio and the companies with low payout ratios than the companies with high payout ratios.

No previous study has tackled the issue of conditional and nonlinear relationship between P/E ratio and payout ratio. This paper attempts to fill the gap by allowing for nonlinear relationship conditional on the relative values of the return on equity and the required rate of return.

The purpose of this study is to compare the performance of a low‐P/E strategy relative to that of two alternative value strategies, one based on the PEG ratio and another on the PERG ratio (a magnitude introduced in this article).

The data used consists of a sample of 100 US companies between January 1975 and September 2002. Portfolios are formed on the basis of different valuation ratios, and their performance is compared in order to determine the best‐performing strategy.

Portfolios sorted by PERG ratios outperform, on a risk‐adjusted basis, those sorted by both P/E ratios and PEG ratios. This outperformance occurs regardless of whether portfolios are not rebalanced, rebalanced every ten years, or rebalanced every five years.

The sample of stocks is not large. The results could be validated by using a larger sample of US stocks and a longer time period, as well as by using a sample of stocks from several international markets.

The PERG ratio proposed in this article improves on the PEG ratio, adjusting the latter by risk. That, plus the fact that PERG‐based strategies outperform on a risk‐adjusted basis strategies based on both P/Es and PEGs, should make it an attractive tool to add to the arsenal of valuation tools used by analysts.

A new valuation tool is proposed, called the PERG ratio, that adjusts P/E ratios by both growth and risk (or, similarly, PEG ratios by risk).

Criticizes previous research on price/earnings ratios (PER) for neglecting their historical links with interest rates and analyses the causal links between interest ratres and the PERs of the Toronto Stock Exchange 300 Index (TSE300) and of seven major Canadian industries 1965‐1997. Explains the methodology and identifies three “distinct PER regimes”: 1965‐1974 (average PER 17.17), 1975‐1982 (average PER 8.92) and 1983‐1997 (average PER 17.2 with a higher standard deviation). Looks at the economic conditions for each period and suggests that current PERs “may not be too high”. Finds a negative correlation between PERs and treasury bill rates, differing between industries; and that the bill rate explains 95 per cent of PER variation for the TSE300, although it is not significant for the gold and silver industry. Adds that divided payout ratios and lower investor risk aversion are positively related to PERs, but that growth rate has a more variable influence. Summarizes the findings and their implications for PER forecasters.

Variations in price/earnings (P/E) ratios are explained in a rational expectations framework by a number of fundamental factors, such as differences in growth expectations and risk. The purpose of this paper is to use a regression model and data from four sample periods (1996, 2000, 2001, and 2008) to separate the earnings/price (E/P) ratio into two parts – the portion of E/P that is related to fundamental determinants and a residual portion that cannot be explained by fundamentals. The authors use the residual portion as an indicator of over or undervaluation; a large negative residual is consistent with overvaluation while a large positive residual implies undervaluation. The authors find that stocks with larger negative residuals are associated with lower subsequent returns and reward-to-risk ratio, while stocks with larger positive residuals are associated with higher subsequent returns and reward-to-risk ratio. This pattern persists for both one and two-year holding periods.

This study uses a regression methodology to decompose E/P into two parts – the portion of E/P than is related to fundamental determinants and a residual portion that cannot be explained by fundamentals. Focussing on the second portion allows us to isolate a potential indicator of stock over or undervaluation. Using a sample of stocks from four time periods (1996, 2000, 2001, and 2008, the authors calculate the residuals from a regression model of the fundamental determinants of cross-sectional variation in E/P. These residuals are then ranked and used to divide the stock sample into deciles, with the first decile containing the stocks with the highest negative residuals (indicating overvaluation) and the tenth decile containing stocks with the highest positive residuals (indicating undervaluation). Total returns for subsequent one and two-year holding periods are then calculated for each decile portfolio.

The authors find that high positive residual stocks substantially outperform high negative residual stocks. This is true even after risk adjustments to the portfolio returns. The residual E/P appears to accurately predict relative stock performance with a relatively high degree of accuracy.

The findings of this paper provide some important implications for practitioners and investors, particularly for the stock selection, fund allocations, and portfolio strategies. Practitioners can still rely on a valuation measure such as E/P as a useful tool for making successful investment decisions and enhance portfolio performance. Investors can earn abnormal returns by allocating more weights on stocks with high E/P multiples. Portfolios of high E/P multiples or undervalued stocks are found to enjoy higher risk-adjusted returns after controlling for the fundamental factors. The most beneficial performance holding period return will be for a relatively short period of time ranging from one to two years. Relying on the E/P valuation ratios for a long-term investment may add little value.

Practitioners and academics have long relied on the P/E ratio as an indicator of relative overvaluation. An increase in the absolute value of P/E, however, does not always indicate overvaluation. Instead, a high P/E ratio can simply reflect changes in the fundamental factors that affect P/E. The authors find that stocks with larger negative residuals are associated with lower subsequent returns and coefficients of variation, while stocks with larger positive residuals are associated with higher subsequent returns and coefficients of variation. This pattern persists for both one and two-year holding periods.

The P/E ratio is widely used, particularly by practitioners, as a measure of relative stock valuation. The ratio has been used in both cross-sectional and time series comparisons as a metric for determining whether stocks are under or overvalued. An increase in the absolute value of P/E, however, does not always indicate overvaluation. Instead, a high P/E ratio can simply reflect changes in the fundamental factors that affect P/E. If interest rates are relatively low, for example, the time series P/E should be correspondingly higher. Similarly, if the risk of a stock is low, that stock’s P/E ratio should be higher than the P/E ratios of less risky stocks. The authors examine the cross-sectional behavior of the P/E (the authors actually use the E/P ratio for reasons explained below) after controlling for factors that are likely to fundamentally affect this ratio. These factors include the dividend payout ratio, risk measures, growth measures, and factors such as size and book to market that have been identified by Fama and French (1993) and others as important in explaining the cross-sectional variation in common stock returns. To control for changes in these primary determinants of E/P, the authors use a simple regression model. The residuals from this model represent the unexplained cross-sectional variation in E/P. The authors argue that this unexplained variation is a more reliable indicator than the raw E/P ratio of the relative under or overvaluation of stocks.

The purpose of this paper is to explore how the price limit policy implemented in 2014 affects initial public offering (IPO) underpricing and long-term performance in China.

The data are the IPOs from Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) between 2004 and 2018. The data are firstly divided into the IPOs before the price limit policy and the IPOs after the price limit policy according to the time of issuance. Then the two groups are divided into 4 subsamples according to the market blocks and the P/E ratio. The authors use multiple regression models to explore the effect of price limit policy in each subsample.

The first-day price limit system for IPOs is similar to the upward fuse mechanism, the purpose of which is to suppress IPO underpricing. However, this study finds that the policy does not suppress IPO underpricing, but increases the underpricing rate in all subsamples. Besides, the long-term performance in each subsample is different from each other. Main Board stocks’ long-term performance is worse after the policy. The policy makes Small and Medium Enterprise Board (SME Board) and Growth Enterprise Market Board (GEM Board) stocks with high P/E ratios perform better in the long term. For SME Board and GEM Board stocks with low P/E ratios, the policy makes no significant effect.

Good policy intentions may sometimes lead to counterproductive effects. However, since the long-term performance of each subsample is different, it is difficult to judge whether the policy should continue to be implemented or cancelled. Implementing different policies for different subsamples may be a better way to solve this problem.

This paper contributes to the study of IPO underpricing and long-term performance from the perspective of price limit policy.

The purpose of this paper is to investigate the flow and the heat transfer characteristics of a two‐dimensional rib‐roughned rectangular duct with the two principal walls subjected to uniform heat flux. In particular, the main goal is to generate friction and heat transfer data, for different values of p/e with square, rectangular, trapezoidal and triangular shape ribs for Reynolds numbers in the range between 20,000 and 60,000 and different heights and to describe the temperature and fluid‐dynamic fields around the ribs.

The model is constituted by a two‐dimensional duct. On the duct wall square, rectangular, triangular and trapezoidal ribs are introduced by changing different geometry ratios. Governing equations are solved numerically by means of the finite‐volume method.

Simulations show that maximum Nusselt numbers are detected in correspondence with dimensionless pitch equal to 12 and 10 for the square, trapezoidal and rectangular ribs, and triangular ones, respectively. Heat transfer rate is at most 2.45 times higher than the smooth duct, when dimensionless height is equal to 0.05, and 1.85 at a dimensionless height equal to 0.02; furthermore, the friction factor is the highest at a pitch ratio of ten for the rectangular, trapezoidal and square ribs while the triangular ones show the maximum values at a dimensionless pitch equal to 8. For Re>40,000 an asymptotic behavior is detected. Best thermal performances are provided by triangular ribs with w/e=2.0 while the rectangular ribs with w/e=2.0 present the lowest friction factor values. Local Nusselt number profiles reveal that the maximum values are detected from three to five times the rib height from the downstream turbulator. Finally, temperature fields and stream function contours are given in order to visualize the temperature distribution and flow pattern in presence of d‐type and k‐type roughness behavior also for triangular ribs.

The paper investigates evaluation of temperature and velocity fields thermal and fluid‐dynamic behaviors (in terms of average and local Nusselt number profiles and friction factors ones) of roughned ducts with different shapes, heights and aspect ratios of ribs in turbulent regime. The thermo‐physical properties of fluid are assumed to be dependent on temperature. The paper is useful to thermal designers.

Investigates the effectiveness of corporate name change signaling in the services industry. Argues that previous studies on the subject are lacking because they failed to distinguish between the services and manufacturing sectors. Uses the trend analysis method and examines the movement of price‐earning ratios during a five‐year period before and after the name change. Evaluates the effectiveness of the name change signaling strategy by testing the difference in means of the “before and after” P/E ratios. Finds that firms who announce name change together with other managerial decisions and regularly release news on other firm‐specific activities fared much better than firms which did not release such information.

The purpose of this paper is to construct and evaluate value and growth portfolios in Portugal, Italy, Ireland, Greece and Spain, which are commonly known as the EU PIIGS, from 2003 to 2015. Previous research evidence suggests that stocks trading at a lower price relative to their fundamentals (value stocks) tend to outperform stocks that trade at higher prices (growth stocks) in the long run. Although this market anomaly has been studied immensely worldwide, especially for the US stock market, there is no clear evidence whether such an assertion is applicable in less-renowned countries.

The paper utilises Fama and Macbeth (1973) regressions and its model extensions.

This paper finds a significant value premium in these countries, which is compatible with previous studies conducted worldwide.

To the best of the authors’ knowledge, this is the first attempt to examine this asset pricing anomaly in the PIIGS.

The purpose of paper is to provide students with a sorting methodology to select securities and build portfolios.

This paper uses various accounting variables for all firms in the S&P 500, sorted by sector. The fundamental metrics are converted into standardized Z‐scores and then combined into a single score used to rank individual firms within each industry. Equity portfolios are then constructed using the aggregate Z‐scores.

In the authors' experience with student‐managed investment funds (SMIFs), students at the start of the course consistently ask how to begin selecting securities or seek to learn a new model for selecting securities. Discussions on stock selection are helpful to engage students in this area, but an attempt is made to further this by providing a comprehensive stock‐selection exercise to help students better understand how to appropriately pick stocks and create a portfolio.

In this exercise, students are reminded of the limitations surrounding the stock‐screening process and are provided with an alternative, more robust method for selecting securities that is commonly utilized by investment professionals. While the exercise described in this paper is done in reference to SMIFs, it is equally applicable to standard investment courses.

This paper provides an exercise which provides students a way to dive deeper into stock selection through stock sorting. Stock selection is typically a hot topic for most students in finance courses. Stock screens may permit a search on multiple variables simultaneously but typically do not allow for applying specific weights to each metric. A sorting method, avoids these issues by permitting the user to create custom variables, affords the opportunity to view all of the variables used in the screening process simultaneously, and includes the option to apply specific weights to each variable.