Solving the Price-Earnings Puzzle
|Author(s):||Carl Chiarella & S. Gao|
|Date of publication:||April 2002|
|Working paper number:||116|
Accounting and finance professionals have empirically known that in the long run stock prices are roughly proportional to earnings. However, econometric testing could not been able to verify this expected contribution of earnings to stock prices, thus formed the price-earnings (PE) puzzle in the accounting literature. This paper seeks to solve this puzzle by allowing the earnings response coefficient to be a variable instead of a constant, and shows that the PE puzzle turns out to be a phenomenon of type I spurious regression in econometrics.
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Chiarella, C. and Gao, S., 2002. "Type I Spurious Regression in Econometrics", Working Paper Number: 114, Finance Discipline Group, University of Technology, Sydney.
Chiarella, C. and Gao, S., 2002. "Modelling the Value of the S&P 500 - A System Dynamics Perspective", Working Paper Number: 115, Finance Discipline Group, University of Technology, Sydney.
Setyaningsih, 2009, "Pengaruh Konservatisme Laporan Keuangan, Dan Siklus Hidup Perusahaan Terhadap Koefisien Respon Laba", Thesis, University Sebelas Maret.