Research On The Relationship Between Price-earnings Ratio And Value Investment

Value investment is a quite important concept in countries where the mechanism of the securities market is comparatively complete such as the United States, and the price-earnings ratio (P/E) is a quite significant reference index in the decision-making analysis of the value investment. Some drawbacks of the mechanism of Chinese securities market get gradually exposed after the economic crisis, and market regulators are making efforts to guide investors making decisions more rationally. In recent years, our market regulators have paid more attention on the guidance of value investment and the two-term Presidents of CSRC both strive to advocate it. Therefore, in Chinese securities market, whether the P/E that is widely used in the analysis of securities investment is relevant to value investment and the degree of this relevance show much significance.On the basis of market efficiency, this paper analyses the relevance of P/E and value investment combining empirical and standard research methods. Firstly, we classify the relevant theories of P/E and value investment and analyses the main influencing factors, finding that there is a big correlation between P/E with enterprise value. Then we use financial data from four aspects:growth, profitability, financial risks and corporate governance to build an enterprise value evaluation system, and we test the correlation between P/E and enterprise value of the state-controlled listed companies and the non-state with the Shanghai A-share data in 2009-2012 respectively.The results show that P/E could reflect the growth, profitability, financial risks and corporate governance to some extent, and the relevance is in an upward trend overall. However, the relevance is still not strong and the correlation in state-controlled listed companies is lower than the non-state.In Chinese securities market, although investors get prone to choose rational investment with the gradually complete market mechanism, P/E is still a reference index in decision-making which is not able to reflect the enterprise value exactly. Only by improving our capital market, investment concept and the internal governance of the listed companies can the price-earnings ratio truly show its value in investment decision-making thus to achieve the goal of guiding the market to carry out value investment.