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• W3123508516 abstract "ABSTRACTMarket multiples of the largest firms are most likely to reflect efficient pricing of stocks. For such firms, variations in market multiples should be largely explained by fundamental variables, and expected returns should be positively related to beta but not significantly related to other factors. This study shows that, for stocks in the Standard & Poor's 100 index, fundamental factors explain almost all of the variations in price/book and price/sales multiples but only 25% of variations in forward price/earnings multiples. Expected returns are positively related to beta, as postulated by the capital asset pricing model. However, contrary to the expectations of the capital asset pricing model and the weak and semi-strong forms of the efficient market hypothesis, expected returns are also significantly negatively related to prior returns and forward price/earnings multiples. These findings are surprising for a sample comprising the largest stocks.JEL: G11, G12KEYWORDS: Market multiples, expected returns, explanatory factors(ProQuest: ... denotes formulae omitted.)INTRODUCTIONAccording to the capital asset pricing model (CAPM) developed by Sharpe (1964) and Lintner (1965), expected stock returns should be positively related to their systematic risk, measured by beta, which is the only factor that should influence expected returns. The semi-strong and weak forms of the efficient market hypothesis (EMH) postulated by Fama (1970) imply that stock returns should not be significantly related to fundamental or technical factors, which constitute public information that should have been incorporated into stock prices. Several studies have shown that stock returns are negatively related to market multiples, such as price/earnings (P/E), price/book (P/B), and price/sales (P/S), and not significantly related to beta. Other studies have indicated that stock returns are negatively related to long-term prior returns and positively related to short-term prior returns.Empirical evidence that stock returns can be predicted with publicly available fundamental or technical factors challenges the validity of the EMH unless we assume that all such variables with predictive power represent risk measures. These findings do not, however, contradict the CAPM since actual stock returns, which are extremely volatile and often negative, cannot be reliable proxies for expected returns. Of course, factors that are significantly related to stock returns may influence expected returns. Empirical evidence indicates that expected stock returns are positively related to beta, as hypothesized by the CAPM, but they are also significantly related to other factors, namely market multiples and prior returns, contrary to the single-factor CAPM.Market multiples represent current stock valuations relative to different accounting variables. If market multiples fully reflect firms' fundamentals, they should represent efficient pricing of stocks and shouldn't have any significant influence on expected stock returns. Market multiples of the largest firms, which are widely and closely followed by analysts and large investors, are most likely to reflect efficient pricing of stocks. For such firms, we would expect variations in market multiples to be largely explained by fundamental variables, and expected stock returns to be positively related to beta but not significantly related to other publicly available factors, such as market multiples or prior returns. This study investigates the extent to which fundamental variables explain commonly used market multiples of firms in the Standard & Poor's (S&P) 100 index and examines whether the expected returns of their stocks are significantly related to beta, market multiples, and prior returns.The remainder of the paper is organized as follows. The next section reviews the literature. The data and methodology are described in the following section. …" @default.
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• W3123508516 title "EXPLANATORY FACTORS FOR MARKET MULTIPLES AND EXPECTED RETURNS" @default.
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