An investigation of the mean reversion of hospitality stock prices towards their fundamental values: The case of Taiwan

Abstract

This paper tested the mean reversion behavior of stock prices in the hospitality and other industry sectors towards their fundamental values, namely earnings per share ( EPS) and dividend per share ( DPS). Cointegration test results showed that DPS is not a good proxy of fundamental values of stock prices in all sectors, while EPS can serve as a good proxy of fundamental values of stock prices only in the hospitality and construction sectors. Further, although hospitality stock prices have diverged away from their fundamental values from time to time, there exists an error correction mechanism in the market, which adjusts hospitality stock prices to return to their fundamental values. We also found that hospitality stock prices driven by their EPS are due to less noise trading and small size in the hospitality industry. Lastly, empirical findings suggest that hospitality stock investors should pay more attention to the underlying performance of hospitality stocks in terms of their earnings per share.