Factors affecting price to earnings ratio (P/E): Evidence from the emerging market

Abstract

The purpose of this study is to investigate the factors that have an impact on price to earnings (P/E) ratios in Jordanian industrial public shareholding companies listed on the Amman Stock Exchange and to help investors determine their investment value by using P/E ratio. The study also aims to help stock issuers with pricing initial public offers using a more scientific model base. In Jordan, only few studies have investigated the factors that affect the P/E ratio in the industrial sector. Therefore, this study contributes significantly to the limited literature on this topic in relation to developing countries. For this purpose, we used a quantitative approach to study data for the whole study population, which consists of sixty firms, during the period 2011–2016. Data on variables were collected over the 2011–2016 period from annual financial reports of industrial companies; market capitalization data were collected from the Amman Stock Exchange; and interest rate data were collected from the Central Bank of Jordan. An empirical study was conducted using panel data regression analyses random effects model to examine the effects of dividend payout ratio, market capitalization (which is a proxy for firm size), leverage ratio, interest rate, and annual growth rate of companies’ net income (a proxy for growth rate) on P/E ratio. This study found that there is a significant positive impact of dividend payout ratio and size on P/E ratio, whereas leverage, earnings growth, and interest rate have no impact on P/E ratio. These results imply that an increase in dividends and large firm size is required to attract investors’ attention and increase their confidence about choosing such firms in their portfolios.