Chinese Company P/e Ratio: Empirical Evidence

The price-earnings ratio as an important indicator of stock valuation, risk, earnings judgment of financial markets, is becoming increasingly important in the era of emphasis on value investing in the domestic stock market. Based on the panel data of160listed companies in China’s A-share market from2004to2010year, this paper study the factors influence the price-earnings ratio and the predictability of stock return by using the price-earnings ratio. First, according the stock pricing theory, summarize the influencing factors. The next step this paper carried the empirical analysis and get the following conclusions:earnings per share growth rate^company’s industry price-earnings ratio、investor expectations and CPI is positively correlated with the price-earnings ratio; capital costs are negatively related to the price-earnings ratio. These conclusions are consistent with the traditional theory. The following points are inconsistent with the traditional theory:the negative correlation between price-earnings ratio and ROE, EPS. The possible explanations are temporary earnings, accounting standards, the market climate of speculation and other factors. Also risk beta and price-earnings ratio are positively correlated, one possible explanation is the CAPM model does not hold in the Chinese stock market. Another point is the size of outstanding shares does not affect the price-earnings ratio, the success of the split share structure reform can explain this problem. GDP growth rate has significant impact on price-earnings ratio, but the direction is not given.Then through the regression of the stock return and price-earnings ratio, one can observe the price-earnings ratio to infer the stock return. But the effect differs in different industries and time periods. From the industry point of view, only electronic and mechanical equipment industry is not significant, other13industries are significant. By examining the regression effect in each year it concludes that the predictive capability of price-earnings ratio in bull market is better than in bear market. Calculated by constructing a portfolio of high and low price-earnings ratio, found that the return gap between portfolios shorten in bull market and expand in bear market. The performance of the low price-earnings ratio portfolio is better than the high price-earnings ratio portfolio in in the bull market. But in the bear market, the performance is opposite. Finally, the paper gives specific policy proposals based on the actual conditions of China and the conclusions.