An Empirical Study On The Relationship Between Modified Pe Ratio&Market Value To Stock Returns

PE ratio is one of the most commonly used valuation indicators in stock investment,which is the reference for investors’ attention.Its level affects investors’choice.Finally,it affects investors’ future earnings.However,in recent years,the relevant researchers found that PE ratio exists self-defect that it is based on earnings.The possibility of inaccurate of the company’s profit leads to price-earnings ratio indicators error,thus affects the interests of investors.Many scholars have found that cash flow makes up the lack of the information deficiencies and distortions,and the impact of cash flow on stock returns is growing.Therefore,taking into account the cash flow factors,this article corrects the PE ratio from the perspective of cash flow.In addition,market value factors will also affect the investment value of the stock.Market value not only affects the liquidity of the stock but also affects the volatility of the stock price,thereby affecting the investment value of the stock.However,scholars dispute the positive and negative correlations between market value and stock returns.Based on this,this paper analyzes the relationship between the core explanatory variables(correlated PE ratio and market values)and stock returns.In the existing literature,the research about the index of investment value of the accounting-PE ratio mainly focus on three aspects as follows:the PE ratio exist incomplete and false problems,modify PE ratio from different angles,and prove the correlation between PE ratio and stock returns.Related literature cut from different perspectives,or use empirical analysis method to study the relevance,or use comparative analysis to analyze whether it has the need to amend.These articles have the following views:first,the PE ratio exists false information deficiencies and defects.So it also should consider the company size,growth,management risk and so on;Second,the price-to-earnings ratio does not affect stock earnings;Third,there is a correlation between PE and stock returns,or positive,or negative.In addition,the related literature about the correlation between scale and stock returns,there are two very different points of view:one view is that PE and market scale stock returns at the same time,and market scale plays a leading role;Another view is that in a certain period of time there is a correlation between the size of the market value and stock returns,and in a certain period of time there is no correlation.This article mainly studied two aspects,one is the measurement model to analyze the relationship between the price-to-earnings ratio,the market value and the stock returns.The other is the portfolio approach to market validation.In the econometric analysis model,this paper selects the stocks of small and medium-sized stocks of a-shares from the first quarter of 2012 to the fourth quarter of 2014 as the research object,and analyzes the relationship between modified PE ratio,the market value and the stock returns from the point of view whether there is a correlation.Market validation model uses 2012-2014 all a-share listed companies as the research object.By constructing portfolio analysis,the model verifies if modified PE ratio is practical and whether the size of the market value is a factor of stock returns.Through theoretical analysis and empirical test,this paper has obtained the following research results:In terms of the relationship between corrected PE ratio and stock returns,there is a significant negative correlation relationship.The high holding period returns about the stock portfolio of low correlated PE ratio is not only far more than the market index,but also higher than that of the traditional PE ratio portfolio selection,it is enough to prove that investors can adjust the decision according to the modified PE ratio in making investment strategy.Empirical results show that market scale has negative correlation with stock returns.In addition,small market scale is one explanation of the excess return of the revised PE ratio portfolio.It can prove that the small market scale can used as a reference index of investors choose stocks in the future.This paper is mainly innovative in the following two aspects:First,the innovation of the research object.Most of the existing literature points out that the accounting value index-PE ratio has its defects,some of the other financial information outside of surplus also have effect on stock returns,but few literature research know how to verify if the metric and revised PE ratio has a better reference value.In this paper,we revise the index and study its relationship with stock returns to make up for this empirical deficiency.Second,innovation of research methods.Related research on the relationship between traditional accounting index-PE ratio by measurement model analysis or descriptive statistics comparison,but the selected sample size is less.This paper revises the traditional accounting index of investment value-PE ratio,and verify the relationship between revised PE ratio,market value and stock returns by regression model,and the selected sample is much more than one times;For the first time,this paper also adopts the method of econometric analysis combined with the market inspection,constructing portfolio by the index of investment value of the revised PE ratio and selecting all a-share listed companies as primary sample inspection.This method not only makes empirical analysis more sense,but also makes the empirical results more comprehensive.