| PE ratio is one of the index referred when discussing the stock market and is frequently used when investing. Famous investor Graham points out PE ratio can be used to discover whether the stock are undervalued or not in his famous book Smart Investors.. As a result, PE ratio becomes to be the tool to measure whether the stock has the investment value and the idea that low PE ratio stocks have more value has been accepted by investors. Besides PE ratio, the market value is also an important factor influencing the investment value of stocks. When there is less capital, the price of low market value stocks is easier to become higher. And the two phenomena can be explained by two financial theories, which are PE ratio effect and small company effect respectively.PE ratio and market value are the factors to influence the rate of return on investment, but the argument exists all the time that whether the index lower or higher will bring more return and the effectiveness between the two indexes, which directly relates to the decision to be taken. The ideas for and against the topic are existing in some degree.The decent that the PE ratio and market value influence the rate on investment relates to the effectiveness to treat them as the reference index. Because the argument still exists, the paper takes it as the starting point to research the difference between the effect that is brought by the different PE ratio and market value.With regard to the difference between the number of the PE ratio and market value, the paper tries to research on the basis of two perspectives:(1)According to the PE ratio effect and small company effect, the lower the index is and the higher the return is. This can be discussed further because the existence of different ideas. (2) The paper tries to divide the PE ratio and market value by interval and compares the difference which brings by the different intervals.With regard to the effectiveness that the PE ratio and market value are regarded as investment index, the paper tries to research on the basis of two perspectives:(l) Aiming at the small company, some literatures point out it has seasonal effect and the effect become obvious during January, but in China is March and August. The market is treated as independent variable and when the PE ratio is added into the model, it can be tested whether the seasonal effect still exists or not, which will represent the effectiveness to regard the index as reference index during the seasonal investment. (2):The small and medium-sized board index's rising or falling will induce to the change of the investors'mentality and some investing habit will also change. So the paper tries to research the effectiveness of PE ratio and market value when the small and medium-sized board index has different condition.Referring to the paper's empirical analysis, the paper chooses the small and medium-sized board to be the object of study, which begins from 3rd season of 2008 to 4th season of 2014. The paper leaves 106 stocks after filtering and eliminating. First, according to the number the stocks should be sorted to distinguish the high and low PE ratio stocks. The paper adopts season T-l (3rd season of 2008,4th season of 2008,…,4th season of 2014)'s PE ratio to calculate the yield of season T because the PE ratio mainly reflect the future stock prices.After the order has been fixed, the paper tries to solve some problems:(l) according to the sequencing, the paper divides it into five groups to compare the average yield of the stocks which have been sorted.(2)To divide the PE ratio and market value according to the interval and compare the average yield of the stocks within the interval. Actually, this way of partition is not common. (3) After the groups of high and low PE ratio have been fixed, the paper analyses the difference of rate on the investment brought by market value.When handling the data, the paper chooses the panel data model because it has been widely used when composing dissertations and the method is really mature. Meanwhile, the paper adds dummy variable PMI to measure the investors' expectation towards future economy, because as it is described in rational expectations theory that the future risk should be considered when investing.During the process of empirical analysis, the paper aims to solve the four problems which have been covered. After the empirical analysis, the paper's conclusions are as follows:Firstly, the dummy variables PMI has played an active role in the model. Secondly, according to the different interval of PE ratio and market value that has been sorted, the conclusions are:(1) When the PE ratio of season T-1 are below 30, the rate of return on investment will be higher than other intervals. And when investing the PE ratio below 50, the different PE ratio within same interval will bring almost same return during season T. (2)Referring to the market value, it doesn't appear the same phenomena as PE ratio, which means that the market value within the same interval also bring different return and this might caused by the idea of investors because they are more sensitive to market value than PE ratio.(3)When how the seasonal PE ratio and market value influence the next season's return, the paper discovers that to invest low PE ratio and market value stocks of the third season during the fourth season, the return will usually higher than investing in other season on condition that the PE ratio and market value are almost the same.The innovation point of the paper are as follows:(1) The paper adds a new variable PMI and it has played an excellent role in the model; (2) The paper adopts a new method to divide the difference of PE ratio and market value and finds the different effect of the interval; (3) Acrooding to the literature review, the paper finds the seasonal effect when there are PE ratio and market value and the applicability and effectiveness when investing in seasons. Actually, the paper still has some deficiencies, such as the theory model is simple and the time span isn't too long because of considering the number of stocks and losses of data. |
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