A Study of Relationship between Macro-Economic Indicators and Price-Earning Ratio and Return on Equity Shares in the Context of Price-Earning Ratio

Abstract

P/E ratio is a most frequently used by investor and is also prescribed by SEBI as one of the important disclosure in offered document of IPO. However, comprehensive literature based on P/E ratio is not available. The Available literature has been concentrated in the US market. Portfolio managers or market pundits take into consideration the macroeconomic variables while talking about P/E. Thus, Study is divided into two parts. First part examines the relationship between earning-price ratio and macroeconomic indicators. The second part proves that high EP (low PE) securities tend to outperform low EP (high P/E) securities. The study is divided into six chapters. Chapter 1 introduces the topic of the study and is followed by chapter 2 on the literature review. Literature review is divided into three subsections. First subsection discusses literature that describes “low P/E ratio securities outperform high P/E ratio securities. Second subsection discusses literature based on determinants of P/E ratio. Third subsection discusses literature of Indian studies on P/E ratio. The review of the literature enables in identifying the research gaps, objective of the study and the hypothesis which are covered in chapter 3. Chapter 4 describes the ‘methodology’. It describes the sample criteria, time period, database, the research model for the study, and the operational definitions of the variables in the study. Chapter 5 covers data analysis procedure for part 1 and part 2. Chapter 6 states the results of the study. It covers the presentation of the findings for the study in two major parts. The first one is divided into three subsections. The first main section discusses result of first part. The first subsection of part 1 comprises of the findings based on the descriptive statistics, transformation of variables to follow normal 17 distribution. The second subsection discusses correlation among all independent variables. The Third subsection describes the results on the findings of the study with respect to the model testing for part 1. The second main section discusses result of part 2. Chapter 7 presents the discussion and conclusion of the analysis reported in the previous chapter. Chapter 8 concludes with sections on methodological, theoretical and practical implications of the study. Chapter 9 discusses limitations and future research directions. Chapter 10 lists all the references used in the study.