Reliability of Price-Earnings Ratio as a Valuation Technique:A Critical View.

Transcription

1 S discussios, sas, ad auhor profils for his pulicaio a: hps:// Rliailiy of Pric-Earigs Raio as a Valuaio Tchiqu:A Criical Viw. Aricl READS 2 auhor: Irahi Ahd Oour Uivrsiy of Kharou 79 PUBLICATIONS 8 CITATIONS SEE PROFILE All i-x rfrcs udrlid i lu ar likd o pulicaios o RsarchGa, lig you accss ad rad h idialy. Availal fro: Irahi Ahd Oour Rrivd o: 9 May 26

2 Rliailiy of pric-arigs raio as a valuaio chiqu: A criical viw * Irahi A. Oour Dpar of Busiss Adiisraio School of Maag Sudis Uivrsiy of Kharou Eail: [email protected] * Kharou Joural For Maag Sudis, issu 2, Volu 2, 26.

3 Rliailiy of pric-arigs raio as a valuaio chiqu: A criical viw Irahi A.Oour [email protected] Asracs A iplici assupio udrlyig pric-arig raio chiqu is ha, is havior ovri is saioary. Th fidig of his papr idicas ha saioariy of pricarigs raio hold oly wh scuriy valuaio is cosis wih h dividd capializaio odl of Gordo. Th papr also shows hr is icosiscy w o-saioary havior of pric-arigs raio ad popular viws hld y praciiors, ha is, highr arigs growh prospcs lad o a highr pric-arigs raio, ad highr risk xposur lads o a lowr pric-arigs raio. Kywords: PE raio; valuaio; risk JEL classificaio:c, C5, G. Iroducio: I h wak of cooic liralizaio, copais ar rlyig or ad or o capial arks, as corpora rsrucurig (rgrs, divsiur c) ar coig coo plac, ad oi vurs ad sragic alliacs ar gaiig populariy. I hs xrciss, a crucial issu o addrssd is: how should a copay or a divisio hrof valud? Th pric-arigs raio is o of h popular scuriy valuaio chiqus. Udr his approach praciiors sia xpcd arig pr shar ad uliply i y appropria pric arig raio o sia irisic valu of a scuriy. Whil hr ar variis of pracics i driig h appropria pric-arig raio ulipl, h udrlyig pris of all hs approachs is ha h pric-arig raio ulipl is saioary or covrg o a cosa valu ovr i. Dspi h rsriciv codiio of saioariy h pric-arig raio rais h os widly rpord idicaor i fiacial dia, ad h o 2

4 srogly dorsd y ladig cosulacy orgaizaios. Th populariy of h pric-arigs raio approach ss o s fro wo ai advaags: (i) Sic h pric-arigs raio rflcs h pric pr dollar of arigs, i provids a covi asur for coparig h prics of shars which hav diffr lvls of arigs pr shar. (ii) Th sias rquird for usig h pric-arigs raio approach ar fwr i copariso wih h sias rquird wh applyig ohr approachs. Whil hr is ovious aracio for praciiors o ak us of h pric-arigs raio as a valuaio chiqu, i us phasizd ha his approach dos o hav a soud cocpual asis as h sia of pricarig raio ulipl lacks a fir horical udrpiigs. I his papr w s up a dyaic srucur o ivsiga h havior of pric-arigs raio ovri Th papr is dividd io four pars. Th coig scio illusras how pric arig raio as a valuaio chiqu is pracicd. Scio hr, illusras h dyaic havior of pric-arig raio ad ivsigas is saioary havior. Th fial scio cocluds h rsarch. 2. Pric-Earigs Raio i Pracic: Th procdur cooly ployd y ivs aalyss o sia h irisic valu of a scuriy usig pric-arigs raio approach ypically cosis of h followig sps: a- Esia h arigs pr shar. - Forcas h arigs growh ra. c- Assss h risk xposur o dri a appropria discou ra d- Esalish a appropria pric-arigs raio. - Dvlop a valu achor ad a valu rag y uliplyig procd arigs pr shar y h pric-arigs raio ulipl. Earigs growh prospcs ad risk xposur (icludd i h discou ra) ar ky valu drivrs of pric-arigs ulipl. Giv ha pricarigs raio follows saioary havior o would xpc highr growh prospcs lad o a highr pric-arig raio, ad highr risk xposur lads o a lowr pric-arigs raio. 3

5 I calculaig h appropria pric-arig raio ulipl i is usually assud (Whick ad Kisor (978)) h pric-arig raio is addiiv fucio of varials ha ifluc h pric-arig raio, ad usig ulipl rgrssio aalysis, h avrag rlaioship w pric-arig raio ad h idpd varials is siad. Th calculad avrag pric-arig raio fro h rgrssio rsul is cosidrd h appropria pric-arig raio ulipl. Th prol wih h rgrssio approach i driig h pricarigs raio ulipl is ha h siad cofficis valus ar o dd o rlial sias if h dyaic pah of h dpd varial i h rgrssio odl, which is h pric-arig raio i our cas, ur o o-saioary. Thr ar wo alraiv approachs o ivsiga h saioary havior of pric-arig raio. O approach is o s up pric-arigs raio i dyaic sig ad ivsiga is havior ovri. Th ohr approach is o sarch h rsidual havior of wll spcifid i sris rgrssio odl ad assss is coforiy wih saioary havior. I his papr w adopd h forr approach ad cocludd ha saioary havior of pric-arigs raio hold oly udr vry rsriciv codiios. 3. Dyaic of Pric-Earigs Raio: Suppos h valu of a dividd payig fir cosis of h discoud sra of xpcd fuur dividds for a fii priod of yars, plus h discoud ark pric of shar a h d of h h priod. Thrfor h shar pric of h fir xprssd as p p () Whr, =O plus a appropria discou ra rflcig risk xposur P =ark pric of a shar a h d of priod = payou raio of ach shar for priod / A pirical rsarch coducd y Goyal ad Wlch (22) o U.S daa cocluds o-saioary havior of dividd-pric raio ad arig-pric raio. 4

6 5 =arig pr shar a priod. =pric-arig raio a i Sic, (2) ) )...( )( ( 2 T g g g Whr sad for (+g ), ad g is arig growh ra a i. Susiuig quaio (2) io quaio () w g: (3) T p Divid oh sids of quaio (3) y o g: (4) T Expadig h righ-had sid of quaio (4), ad akig io accou =,,2..w g: (5) 2 2 ) ( 2 ) ( T T I ligh of quaio (4) ad assuig +i =, quaio (5) ca rducd io: (6) Equaio (6) rprss a o-hoogous firs-ordr diffrc quaio. Is soluio characrizs h dyaic havior of pric-arig raio. Th soluio of quaio (6) (s h appdix for dails) yild: (7) ) ( ) (

7 Th firs r o h RHS of quaio (7) copasss h shor-r cyclical havior, whras h las r is h log r saioary soluio. Th dyaic havior of quaio (7) idicas a o-saioary pah of h pric-arigs raio as divrg fro is saioary soluio, as dpicd i h followig figur, wh >: ( ) ( ) ( ) (i) As ca vrifid fro quaio (7) saioary havior of pric-arigs raio hold oly wh ( ). Sic siplificaio of ( ) rsuls i h dividds capializaio odl of Gordo, p ( ), h w dduc ha saioariy of pric-arigs raio is saisfid oly wh scuriy valuaio is cosis wih h dividd capializaio odl. Howvr, i should od ha hr ar a ur of cass whr irisic valus of scuriis ar xpcd o divrg fro valus asd o h dividd capializaio approach. Wh ivsors ar priarily oivad y capial gais, as opposd o dividd ico oivs, dividd capializaio odl xpcd o yild uralisic valus. Sic a priori kowldg of dividd sra is ssial par of h dividd capializaio odl, i h asc of pr-aoucd dividd policy, shars valuaio, via h dividd capializaio odl, will iflucd y ad hoc 6

8 assss of fuur dividd sra. Also o od ha h dividds capializaio odl dpds o h xplici assupio ha cos of capial, or discou ra, is grar ha h arig growh ra. This rsricio xcluds growig firs wih accss o rlaivly chap capial sourc. Th o-saioary havior of pric-arigs raio, as show i h figur aov, ivalidas h coo viw hld y praciiors ha highr arigs growh prospcs lads o highr pric-arigs raio, ad highr risk xposur lads o lowr pric-arigs raio. I is idicad i h figur, h o-saioary pah of pric-arigs raio dpds o h divrgc of h iiial valu of pric-arigs raio fro is log-r saioary valu. 4. Cocludig rarks: I his papr rliailiy of pric-arigs raio as a valuaio chiqu of scuriis is ivsigad. A iplici assupio udrlyig pricarigs raio chiqu is ha is havior ovri is saioary. W show i his papr ha saioary havior of pric-arig raio hold wh h havior of shar prics ar cosis wih h assupios of dividd capializaio odl of Gordo. Wh dad for shars is oivad priarily y capial gais, dividd capializaio odl is ulikly o yild ralisic rsuls. Siilarly i h cas of growig firs wih accss o lowr cos of capial h dividd capializaio odl also xpcd o yild uralisic valus as cos of capial fall shor of growh ra of arigs. Th papr also shows ha o-saioary havior of pric-arigs raio is icosis wih h coo lif ha highr growh prospc lad o a highr pric-arigs raio ulipl, ad a highr risk xposur lads o a lowr pric arigs raio ulipl. 7

9 Appdix Equaio (6) ca r-wri as: ( a) To solv for h hoogous par of quaio (a), l ah Th, Ah h, or h, hrfor A To solv for h o-hoogous par of quaio (a), l k, h k k or k ( ) h ( ) Coiig h hoogous ad h o-hoogous soluios yild, A ( ) ( a2) L =, o g A ( ) or, A ( ) Th susiuig h las quaio for h ukow A i quaio (a2) w g quaio (6). 8

10 Rfrcs. Ardii F., ad Pikro J., Th Valuaio ad Cos of Capial of h Lvrd fir wih growh opporuiis Th Joural of Fiac, Vol., 33, March Buro, M. Equiy Yilds, Growh, ad h Srucur of Shar Prics Th Arica Ecooic Rviw, Dc., Chadra P., Fiacial Maag, Thory ad Pracic; 4 h diio, 999, Taa McGraw-Hill 4. Edwi E., ad Mari C., Valuaio ad Cos of Capial for Rgulad Idusris Th Joural of Fiac, Vol., 26, Ju Mari M., A Ivs Opporuiis Sock Valuaio Modl Basd o Growh Pars of Equiy Joural of Fiac, Ju Roichk A., ad Boqu M., A No o h Bhavior of Expcd Pric- Earigs Raios Ovri Joural of Fiac Vol., 26, Ju Saly C., Valuaio, Capial Srucur, ad Sharholdr Uaiiy for Dposiory Fiacial Irdiaris Th Joural of Fiac, Vol., 38, Ju Whik V., ad Kissor M., Modr dvlop I Ivs Maag, 2 d diio, 978, Pragr, Nw York. 9