The Relationships Between P/B Ratio, P/E Ratio And ROE & The Rational Levels Of P/B Ratio And P/E Ratio

After nearly two decades of development, Chinese mainland securities market is still an emerging market. By the impact of financial crisis, Chinese stock market and the investors are facing a severe ordeal.The valuation of listed companies is the most important and critical part of Securities Analysis. This valuation plays an important bridging effect in the securities market analysis from macroeconomic analysis, capital market analysis, industrial analysis and financial analysis to the investment strategy proposal. It is also the basic point for macroeconomic, industrial and financial analysis as all the work offers a basis for the company valuation so as to make investment decisions and determine strategic preferences.The contents of this thesis are divided into six chapters allocated as below: Chapter 1 is"Introduction"about the backgrounds of selecting research targets and the brief meaning of whole thesis. Chapter 2 is"Literature Review". Chapter 3 is"Research Approach and Research Model", including the research hypothesizes."Research Sample and Statistical Treatment"is allocated as Chapter 4, which including data source, sampling rule and descriptive statistic. The data dealings and results are in the Chapter 5"Research Results and Analysis". The last chapter is"Conclusions"about summary of research results and limitations as well as comments of further researches.From Feltham-Ohlson Model, this thesis derives the relations between P/B ratio, P/E ratio and Return on Equity(ROE).Then the thesis uses domestic data from 1998 to 2007 to verify Hypothesis 1"high future ROE means high P/B ratio" and Hypothesis 2"high currently ROE means high P/E ratio rate". The result reveals the first hypothesizes can not be rejected in domestic capital markets, but the second one can not be proved, which means domestic investors can not fully understand the information of public accounting data and make investment decisions.This paper establishes a experiential model about stock price of Chinese listed company by using Feltham-Ohlson stock option theory and model,and explains rational P/B ratio and rational P/E ratio using company accounting statement data of China stock market from 1998 to 2008. This thesis provides one valuation modeling techniques through the respective analyses of basic factors and public accounting data.The results of this thesis means that domestic stock investors may be underreact to public accounting data in capital markets. Thesis analyzes some reason of the phenomena and gives a probable reason:"the relationships of P/B ratio, P/E ratio and ROE, the rational level of domestic securities markets"can not recognize fully, which need further research to test.