Abstract
Price/Earnings (P/E) ratio, a well known assessment method, has constantly remained at the centre of awareness of market analysts and investors ever since the origin of discounted dividend growth model of Gordon and Shapiro (1956). In line with that, this study aims to reveal the variables that explain the variation in P/E ratio, a proxy of the confidence index, by using unbalanced pooled cross-sectional time series Ordinary Least Square (OLS) regression model on Amman Stock Exchange listed companies for the period 1999-2013. Financial sector firms’ and non-consistently dividends-paying firms were excluded resulting in 1380 firm-year observation. Results implied that dividend payout ratio, earning growth rate, Tobin’s Q and firm size significantly clarify variations in confidence index of firms listed in ASE, demonstrating that investors’ confidence of investing in ASE is more for small company with higher dividend payout ratio, high earning growth rate and high firm’s market value. This paper is likely to help decision makers to assess variables that can clarify contrast in company’s P/E ratio in order to gain investors’ confidence and thus choose these companies to be a part of their portfolio.
Highlights
It is well known that there are many factors that play a role in determining the prices of shares traded in the financial markets, It is known that some of these factors may not be quantitative or financial factors
For financial analysts the identification of these factors is the most important everyday’s problems they face. Proceeding from this problem, this study seeks to identify factors that affect the P/E ratio, a proxy of the confidence index, of companies listed in the Amman Stock Exchange (ASE)
Namely P/E ratio, dividend payout ratio, earnings growth rate, discount rate, firm’s size, leverage ratio and Tobin’s Q, has been driven from the historical information provided by officially website of the Amman Stock Exchange (ASE)
Summary
It is well known that there are many factors that play a role in determining the prices of shares traded in the financial markets, It is known that some of these factors may not be quantitative or financial factors. For financial analysts the identification of these factors is the most important everyday’s problems they face. Proceeding from this problem, this study seeks to identify factors that affect the P/E ratio, a proxy of the confidence index, of companies listed in the Amman Stock Exchange (ASE). The association between share prices and basics (e.g. firm income, dividends and book-value) has always remained as the focus area of attention. In this view, P/E ratio has gained huge reputation for assessing individual stocks, sectors and stock markets as possible investments. P/E ratio has gained huge reputation for assessing individual stocks, sectors and stock markets as possible investments. .Existing literature has sorted the determinants of P/E ratio in accordance with to the market analysis and sector analysis
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