“Empirical study on Determinants of P/E ratio in financial management”

Abstract

Well-known economists as well as investors have examined anomalies in the stock exchange around the world for decades. Investors’ trying to beat the market in order to earn a quick buck or dollar is often what motivates them. With an investment strategy based merely on purchasing stocks with low price per earnings ratios it is said to be possible to beat the index. This so-called price per earnings effect is such an anomaly and is exactly what will be under scrutiny in this paper. Purpose The purpose of this study is to examine the price per earnings effect and whether it is in fact possible to generate abnormal profits on the Stockholm Stock Exchange by constructing a portfolio consisting merely of stocks with low P/E ratios. The research question here is: “How does one make abnormal returns by taking advantage of the price per earnings effect?” The present study is based on secondary data and that is collected from books, journals and website etc. This result answers the research question and verifies that it was in fact possible to make abnormal returns.