Common stock appraisal in relation to their price-earning ratios using risk-adjusted measures : an emerging market perspective

Abstract EN

In this paper, an attempt was made to determine empirically the relationship between investment performance of equity securities and their P/E ratios using risk-adjusted measures.

While the efficient market hypothesis denies the possibility of earning excess returns, the price-earnings hypothesis highlighted that P/E ratios, due to exaggerated investor expectations, may be indicated of future investment performance.

The study used 83 of Jordanian Companies listed on Amman Stock Exchange (ASE), one of the emerging markets, and observed the monthly returns of these firms over the period ◌ِApril 1996- March 2004.

This issue has not yet been subjected to direct empirical investigation at the emerging markets such as ASE, which provides the importance of this study.

After adopting the Augmented Dickey-Fuller Unit Root for testing the satisfying stationarity assumption, Ordinary Least Squares (OLS) regression results suggest that gaining abnormal return is a function of changes in Portfolio’s P/E over the period considered.

The study, therefore, supports the hypothesis that the P/E has important implications for portfolio’s performance, a result supporting the rejection of the semi-strong level of efficiency for ASE.

KEYWORDS: Price-Earnings Ratio; Portfolio’s performance; Capital Market Efficiency; Common Stock Appraisal.