The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth

Article Abstract:

A study was conducted to interpret the price-earnings ratio (P/E) and the market-to-book ratio (P/B) and describe their articulation. It also aimed to explain the role of book rate-of-return on equity in determining the ratios and the relation between them. The P/E ratio signifies future growth in earnings positively related to expected future return on equity and negatively related to current return on equity. On the other hand, the P/B ratio indicates only expected future return on equity. The articulation of the two was based on the dividend discount formula and the clean-surplus accounting relation, in addition to a description of normal expected return on equity that equals cost of capital. Empirical evidence showed that return on equity reflects differential P/B ratios but not P/E ratios, except in the extremes. However, current return on equity is not a good indicator of P/E.

Corporate growth, Price-earnings ratio, Price earnings ratio, Ratio analysis

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Issues in testing earnings management and an instrumental variable approach

Article Abstract:

Proposed methodologies for testing earnings management are flawed in that they suffer from simultaneity, errors-in-variables or omitted variable problems. Any of these problems can lessen the statistical power and distort inferences regarding earnings management. A method that mitigates these problems is introduced. It alleviates the simultaneity and errors-in-variables problems by using an approach based on the instrumental variable problem by applying all major components as regressors. Simulations are performed to test the efficacy of the model. Results show that IV-based methods are superior to the model proposed by Jones (1991) and that the greatest power and robustness is generated by the generalized method of moment estimation procedure.

Methods, Management, Financial management, Cash management, Instrumental variables (Statistics), Instrumental variables

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Market rewards associated with patterns of increasing earnings

Article Abstract:

Research suggests that corporations with a history of increasing earnings can have better price-earnings multiples. The authors discover that increasing earnings are positively correlated with growth and are negatively correlated with risk.

Statistical Data Included, Models, Economic aspects, Risk management, Financial analysis, Earnings per share

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