Search results

1 – 2 of 2
Per page
102050
Citations:
Loading...
Access Restricted. View access options
Article
Publication date: 3 June 2014

Vichet Sum

– The purpose of this paper is to investigate the dynamic effect of Tobin's q ratio on price-to-earnings (PE) ratio.

1782

Abstract

Purpose

The purpose of this paper is to investigate the dynamic effect of Tobin's q ratio on price-to-earnings (PE) ratio.

Design/methodology/approach

The objective of this study is to investigate the dynamic effect of Tobin's q on PE ratio. To achieve this objective, a vector autoregressive analysis (Equation (1)) is employed to analyze the quarterly data from 1951Q4 to 2012Q4 to determine the generalized impulse response functions and perform the variance decomposition of Tobin's q ratio on PE ratio. The Granger causality Wald test is performed to determine if Tobin's q ratio causes PE ratio and vice versa.

Findings

Based on the analysis of the quarterly market-level data from 1951Q4 to 2012Q4, the results show that PE ratio significantly drops immediately following the shock to the change in Tobin's q ratio. The results from the Granger-causality test indicate that Tobin's q ratio change causes PE ratio to drop. There is not a reverse causation from PE ratio to Tobin's q ratio change. The variance decomposition results reveal that Tobin's q ratio change forecasts about 67.53 to 67.78 percent of PE ratio at the two-quarter to eight-quarter horizons.

Originality/value

Up to this point, there is not a single study in the literature investigating the relationship between Tobin's q and PE ratios. Consequently, the current study is set up to investigate the dynamic effect of Tobin's q ratio on PE ratio. A major contribution of this study is to provide empirical evidence of the dynamic effect of Tobin's q ratio on PE ratio.

Details

Managerial Finance, vol. 40 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

Available. Content available
Article
Publication date: 7 March 2016

26

Abstract

Details

South Asian Journal of Global Business Research, vol. 5 no. 1
Type: Research Article
ISSN: 2045-4457

1 – 2 of 2
Per page
102050