Price-Earnings Ratio and Influence Factors: Evidence From China

Abstract

This paper studies relations between P/E ratios and influence factors. It employs data of average P/E ratios in Shanghai and Shenzhen stock markets, as well as the companies’ P/E ratios from Hushen 300 Index on empirical research. It aims to reveal correlations between P/E ratios and influence factors, the impact of influence factors on P/E ratios and to build regression models for estimating and forecasting P/E ratios. The purpose of the study is to provide theoretical model foundations for estimating and forecasting of P/E ratios for investors when judging investment values according to P/E ratios and corresponding indices. It also gives an instruction for the IPO pricing.

The empirical researches are divided into two parts, one on the market average P/E ratios and the other on the companies’ individual P/E ratios. Descriptive analysis, correlation analysis and regression process are used to examine the correlations. Finally regression models are derived to supply theoretical model reference for estimation and prediction on P/E ratios.

The empirical results demonstrate that macroeconomics indices have limited effect on market average P/E ratios for the market’s weak reflection of national economy. Industrial and financial indices should be taken into account when estimating the companies’ individual P/E ratios. Moreover, the research effect will be better with more factors employed.