Decomposing the Price-Earnings Ratio

• DOI: 10.2139/ssrn.739665
• Publication Date: 2011-12-28T16:25:09Z
• Authors: K. P. Anderson; Chris Brooks
• Keywords: 0502 economics and business; 05 social sciences; 8. Economic growth

The price-earnings ratio is a widely used measure of the expected performance companies, and it has almost invariably been calculated as current share price to previous year's earnings. However, P/E particular stock partly determined by outside influences such year in which measured, size company, sector company operates. Examining all UK companies since 1975, we propose modified that decomposes these influences. We then use regression weight factors according their power predicting returns. decomposed able double gap annual returns between value glamour deciles, thus constitutes useful tool for fund managers hedge funds.