The Long-Term Price-Earnings Anomaly on the Finnish Stock Market
Asmala, Tommi (2009)
Asmala, Tommi
2009
Kuvaus
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Tiivistelmä
Recent evidence from the U.K. stock market suggests that adding several years of earnings data to the calculation of the price-earnings ratio amplifies the abnormal returns of low P/E stocks. This study investigates if this effect of returns’ increment can be achieved on the Finnish stock market as well. In order to do this the different price-earnings statistics are calculated and stocks are grouped to portfolios on the basis of these statistics. The returns of holding periods to up to four years are then calculated and tested to see if the magnitude of abnormal returns is amplified.
This study uses Finnish stock market from 1994 until 2008 and earnings history data from the time period of 1989 to 2006. The time period is also divided into a bull and a bear market to see if this has an effect on the value premium. The P/E ratios are calculated by using up to five years of past earnings data to achieve a wide variety of multiples to estimate the performance of the price-earnings ratio as an indicator of future returns. The ratios’ predictive power is researched to see which of the statistics functions as the best indicator.
The main findings of the study imply that, although a positive mean value premium is recorded throughout the data set, stocks with low price-earnings ratio do not yield abnormal returns. Furthermore, the results of value premium testing indicate that the positive value premiums on the Finnish stock market are not statistically significant, but are dependent of the state of the market. Also, the results suggest that there is no statistically significant difference between the returns of the portfolios consisting of stocks grouped by using just one year of past earnings data and the ones grouped by the use of multiple years. Furthermore, the addition of previous years’ earning data does not seem to add to the predictive power of the price-earnings ratio. Hence, the long-term price-earnings effect seems not to exist on the Finnish stock market.
This study uses Finnish stock market from 1994 until 2008 and earnings history data from the time period of 1989 to 2006. The time period is also divided into a bull and a bear market to see if this has an effect on the value premium. The P/E ratios are calculated by using up to five years of past earnings data to achieve a wide variety of multiples to estimate the performance of the price-earnings ratio as an indicator of future returns. The ratios’ predictive power is researched to see which of the statistics functions as the best indicator.
The main findings of the study imply that, although a positive mean value premium is recorded throughout the data set, stocks with low price-earnings ratio do not yield abnormal returns. Furthermore, the results of value premium testing indicate that the positive value premiums on the Finnish stock market are not statistically significant, but are dependent of the state of the market. Also, the results suggest that there is no statistically significant difference between the returns of the portfolios consisting of stocks grouped by using just one year of past earnings data and the ones grouped by the use of multiple years. Furthermore, the addition of previous years’ earning data does not seem to add to the predictive power of the price-earnings ratio. Hence, the long-term price-earnings effect seems not to exist on the Finnish stock market.