Analysis On Sensitivity Of Excess Earning Of Incremental-Investment Of The P/E Ration

In recent years, with the shortage of domestic resources and environmental problems are highlighted, China Government is promoting the development of emerging industry, hoping to improve the efficiency to use resource and achieve sustainable development. Therefore, there has appeared many listed companies of emerging industry, which want to increase their value. But the problem of valuation of emerging industry has not been solved. In the stock market, we will find the price-earnings ratio (P/E) of some listed companies of growth enterprise is higher than the listed companies of mature industry. And even if the listed companies are in the same industry, the stock’s price is very different. Therefore, we need find essential factor behind price to perfect valuation theory.In this article, on the basis of abnormal return investment model (Martin L.Lei bowitz, Stanley Kogelman,1990), it puts forward the concept of excess earnings of incremental-investment (EEII) and excess earnings of incremental-investment sensitive model. The so-called excess earnings of incremental-investment is that when investment funds are invested in the original industry or emerging industry, it will result in getting more excess return than current earnings, and we define it as excess earnings of incremental-investment (R-K). In order to prove sensitivity of EEII to P/E, it takes Lithium-battery and household electrical appliance industry’s listed companies on stock markets of Shanghai and Shenzhen as empirical comparative samples. And according to the financial data of listed companies and EEII model, it calculates two industries’sensitivity coefficient. And it has independent samples T test and regression analysis to sensitivity coefficient. Finally, as we have shown, the sensitivity of low-value company’s (the main business income is low) excess earnings of incremental-investment to P/E is higher than the traditional and high-value company’s.From the point of the excess earnings of incremental-investment, assessing the stock value is the exploration to the essence factor. On the one hand, it considers the company’s future growth as emerging industry. On the other hand, it provides us with the idea of assessing the future value of the stock, combining industry’s and company’s core strengths. At the same time, it gives us some reasonable explanations. For example, the reason that companies of low earnings per share maintain a high stock price or high P/E ratio, while mature companies keep low valuation. And it also can illustrate the phenomenon of reorganization of assets.