Abstract
Using separately AMEX, NASDAQ and NYSE stock market data for the period 1968-2011, the purpose of this paper is to examine whether negative multiple firms are different from positive ones by examining the performance of negative P/E or P/B firms and how this performance compared with the most widely examined positive multiples firms. We find that firms with negative multiples are indeed different than firms with positive in that (a) a relatively small number of firms with negative multiples experience high forward stock returns even though the majority of them does not resulting in a large difference between mean and median returns and (b) the small firm-low liquidity effect observed in positive multiple firms is not as clearly observed in the case of negative multiple firms. This indicates that prior academic research was right in excluding negative multiple firms from their analysis as inclusion would have affected the homogeneity of their sample and would have diluted their findings and tests of significance.
Highlights
A large body of academic research has examined the performance of firms with different levels of positive price-to-earnings (P/E) or priceto-book (P/B) stocks, but there is not much research with regards to the performance of negative price to earnings (P/E) or P/B firms and how this performance compares with the most widely examined positive multiples firms [110]
This paper shows that firms with negative multiples are different than firms with positive in that (a) a relatively small number of firms with negative multiples experience high forward stock returns even though the majority of them does not resulting in a large difference between mean and median returns and (b) the small firmlow liquidity effect observed in positive multiple firms is not as clearly observed in the case of negative multiple firms
This indicates that prior academic research was right in excluding negative multiple firms from their analysis as inclusion would have affected the homogeneity of their sample and would have diluted their findings and test of significance
Summary
A large body of academic research has examined the performance of firms with different levels of positive price-to-earnings (P/E) or priceto-book (P/B) stocks, but there is not much research with regards to the performance of negative P/E or P/B firms and how this performance compares with the most widely examined positive multiples firms [110]. Academic papers, such as the ones referred to above, exclude from their analysis negative P/E or P/B firms. We see no reason to wait until June given that a stock selection strategy can be implemented at an earlier time
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