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Does Low Price-Earnings Multiple Fetch Higher Scrip Returns in India?
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The study investigates the relationship between the Price-Earnings multiple and the scrip returns in India. A sample size of 80 companies comprising of 8 different industries listed in Bombay Stock Exchange were taken up for a time period of 08 years from January 1st, 2001 to December 31st, 2008. Rather than a single holding period, the study considers multiple holding periods ranging from six months to four years. Eight different portfolios were constructed on the basis of the price-earnings of the scrips and their returns were compared. The study finds an inverse relationship between the price-earnings multiple and scrip returns, which levers up as the duration of the holding period increases. The variability of the scrip returns is explained to a greater extent by the linear relationship between the price-earnings and scrip returns during relatively longer holding periods (two to four years). It is also identified that the annualized returns of the low price-earnings based portfolios (value stocks) are greater than the high price-earnings based portfolios (glamour stocks) and the paired t test confirmed that the holding period duration of four or three years instead of six months or one year earn significantly higher annualized returns.
Keywords
Equity Investment Strategy, Glamour Stocks vs. Value Stocks, Price-Earnings Multiple, Price-Earnings Ratio.
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