Nezlobin, Alexander, Rajan, Madhav V. and Reichelstein, Stefan (2016) Structural properties of the price-to-earnings and price-to-book ratios. Review of Accounting Studies, 21 (2). 438 - 472. ISSN 1380-6653
Full text not available from this repository.Abstract
We examine the structural properties of a firm’s price-to-earnings (P/E) and price-to-book (P/B) ratios and the relation between these two ratios. A benchmark result is obtained under the hypothesis that firms use replacement cost accounting to value their operating assets, so that the P/B ratio coincides with Tobin’s q. The firm’s P/E ratio can then be expressed as a convex combination of the P/E ratios suggested respectively by the permanent earnings model and the Gordon growth model, with the relative weight to be placed on these two endpoints determined entirely by Tobin’s q. Under current financial reporting rules, the accounting for operating assets is likely to be more conservative than replacement cost accounting. Our findings characterize how the magnitude and behavior of the P/E and P/B ratios are jointly shaped by several key variables, including both past and anticipated future growth, economic profitability, and accounting conservatism
| Item Type: | Article |
|---|---|
| Official URL: | https://link.springer.com/journal/11142 |
| Additional Information: | © 2016 Springer Science+Business Media New York |
| Divisions: | Accounting |
| Subjects: | H Social Sciences > HF Commerce > HF5601 Accounting H Social Sciences > HG Finance |
| JEL classification: | M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification and Scope, Age, Profit, and Sales G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions |
| Date Deposited: | 04 Nov 2019 11:39 |
| Last Modified: | 11 Oct 2024 07:36 |
| URI: | http://eprints.lse.ac.uk/id/eprint/102351 |
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