The stock return predictability: comparing P/E and EV/EBITDA

Abstract

Purpose – The aim of this work is to pinpoint the association between stock retuns and financial dynamics, market dynamics and regional and firm-specific uncertainties. While dividend yield, P/E, EV/EBITDA, P/B, Investment Ratio, Leverage, Intangible Assets, Topline Growth, Country Risk, Standard Deviation, Geopolitical Uncertainties, and Liquidity are taken into consideration as factors affecting stock returuns, lagged value of dependent variable is also accepted as independent variable. Methodology- All the equations are figured out by Generalized Method of Moments (GMM) while 2.549 data of 204 companies from 24 sectors traded at BIST between 1998-2014 are used in the study. Findings- According to the outcomes of the model, the rise in Expected Dividend Yield, Investment Ratio, Sales Growth and Liquidity influence positively stock returns, whereas the uptrend in geopolitical risks, country risks, company specific risks and intangible investments affect the stock returns negatively. The decline in P/E and EV/EBITDA increases stock returns. Conclusion- In addition to the increase in net profit, investment, dividend and sales, firms can ramp up their corporate value by using liquidity provider operations and augmenting free float ratios, and they can leverage the value in their operational activities. Also, while investors pay close attention to P/E and EV/EBITDA multiples simultaneously, investment maturity of them are about 1 year.