The investigation of Price-Earnings Ratio (P/E) and return on stock: the case of Tehran Stock Exchange

Abstract

As every investor in the selection of his investment project considers two important factors, return and risk of stock and as one of the comparison indicators of stock risk of different companies is price-earnings ratio, the current study focused on two factors of return on stock and price-earnings ratio and investigated the relationship between these two variables. In this study, the price-earnings ratio and stock return were analyzed by the data of this ratio and the latest daily trading price of the companies that in the calculation of stock return is used in April of 2001 to March of 2008 for 46 companies the member of sample population. By econometric tests, the validity conditions of satisfaction of regression equation in the mentioned companies were analyzed. The results of the regression indicate a positive and significant relationship between stock return and price-earnings ratio; it means that this ratio is a significant variable to explain the stock return.