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Determinants of the Price - Earnings Ratio of Industrial Stocks, 1962-1966

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Determinants of the Price - Earnings Ratio of Industrial Stocks, 1962-1966 Louisiana State University LSU Digital Commons LSU Historical Dissertations and Theses Graduate School 1968 Determinants of the Price - Earnings Ratio of Industrial Stocks, 1962-1966. Hite Bennett Louisiana State University and Agricultural & Mechanical College Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_disstheses Recommended Citation Bennett, Hite, "Determinants of the Price - Earnings Ratio of Industrial Stocks, 1962-1966." (1968). LSU Historical Dissertations and Theses. 1377. https://digitalcommons.lsu.edu/gradschool_disstheses/1377 This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Historical Dissertations and Theses by an authorized administrator of LSU Digital Commons. For more information, please contact [email protected]. This dSeeertatton has hew microfilmed exactly ** received 68-10,719 BENNETT, Hite, 1926- DETERMINANTS OF THE PRICE-EARNINGS RATIO OF INDUSTRIAL STOCKS, 1962-1966. Louisiana State University and Agricultural and Mechanical College, Ph. D., 1968 Economics, finance University Microfilms, Inc., Ann Arbor, Michigan DETERMINANTS OF THE PRICE-EARNINGS RATIO OF INDUSTRIAL STOCKS, 1962-1966 A Dissertation Submitted to the Graduate Faculty of the Louisiana State University and Agricultural, and M echanical College in partial fulfillment of the requirements for the degree of Doctor of Philosophy in The Department of Business Finance and Statistics by Hite Bennett B.S., Texas A. & M. University, 1949 M .B.A., Louisiana State University, 1966 January, 1968 ACKNOWLEDGEMENT The writer is indebted to Professor Donald E. Vaughn, Chairman of his Supervisory Committee, for guidance throughout this research. Appreciation is extended to Professors P. P. Boyer, Roger L. Burford and Donald L. Woodland for their many helpful suggestions as the work progressed. The advice and encourage­ ment so willingly provided by Professors Stanley W. Preston and William J. Stober is gratefully acknowledged. It is a pleasure to acknowledge also assistance of the staff of L, S. U. Computer Center, especially Dr. E. L. Morton, in the analytical phase of the study. To Mrs. Jackie Lockwood, thanks are due for her expert preparation of the manuscript. Finally, the writer is grateful to his wife and daughters for their patience and encouragement throughout the course of this work. ii TABLE OF CONTENTS CHAPTER P*ge ACKNOWLEDGEMENT................... ii LIST OF TABLES................................................................................. v i 1IST OF FIGURES . ........................................................................v iii ABSTRACT............................................................................................... * I . INTRODUCTION. .................................................... 1 Significance of the Price-Earnings Ratio ....................... 1 Time Variation in Price/Earnings ....................................... 4 Scope of the Investigation .................................................... 8 Outline of the W ork .................................................................. I I II. REVIEW OF SELECTED PREVIOUS ST U D IE S.......................... 14 General C haracteristics........................................................ 14 The Meader Studies ............................................................... 15 Cottle and Whitman Data .......................... 17 Investigation by Benishay ..................................................... 19 Model Developed by G ordon ............................................... 22 Research by W ippern............................................................... 26 The Latane-Tuttle Findings ................................................. 28 Apparent Problem Areas ........................................................ 30 III. PRICE-EARNINGS RATIO MODEL - PART ONE....................... 32 Characteristics of Multiple Regression Analysis. 32 Foundations of the M odeL .................................................... 34 General Influences on the P-E Ratio. .............. 40 Fundamental V ariables ........................................................... 42 Structural Variables .................................................................. 55 IV. PRICE-EARNINGS RATIO MODEL - PART TWO ..................... 61 Technical M easures.................................................................. 61 ill CHAPTER Page Specification of Dummy Variables ................................... 77 Indicators of the Economic Environment ...................... 79 Summary of the Model .................................... 89 V. SAMPLE DESIGN............................................................................. 93 Restriction of the Universe ................................................. 93 Stratification ............................................................................. 98 The Sam ple................................................................................. 102 Characteristics of the Sample........................................... 104 VI. DATA COLLECTION AND PROCESSING................................... 109 Basic D a ta .................................................................................. 109 Computational Procedures and Adjustments ............... 118 Data Processing Programs ................................................. 123 VII. ANALYSIS AND RESULTS............................................................. 126 Sample Values of the Variables ........... .. 127 Analytical M ethods ............................................................... 133 The Distribution of Price-Earnings Ratios ....... 140 Effect of Environmental V ariables ................................... 147 Influence of the Internal Variables .................. 149 Combined Regression with All Variables ....................... 158 Stratification and Cross-Section A nalyses ................ 163 VIII. EVALUATION AND POTENTIAL APPUCATION OF THE MODEL..................................................................................... 168 G en eral ........................................................................................ 168 Review of Variables ............................................................... 170 Potential A pplications ......................................................... 175 IX. SUMMARY AND CONCLUSIONS................................................. 182 S um m ary..................................................................................... 182 Conclusions ..................................................... 165 Possibilities for Future Research ................................... 188 iv CHAPTER Page SELECTED BIBLIOGRAPHY................................... 189 APPENDICES..................................................................................... 198 V ITA ..................................................................................................... 265 v LIST OF TABLES TABLE Page 2.1. Results of Regression Analyses of 90 Stocks, 1930-1939 ................................................................................. 16 2.2. Regression Coefficients of Variables Influencing the Eamings-Price Ratio - Cross-Section Analyses of 56 Firm s ............................................................... 21 2.3. Regression Coefficients for Ad lev Model Determination of Stock Price - Food Sample .................. 24 2.4. Regression Coefficients for Ad lev Model Determination of Stock Price - Machinery Sample . 25 2.5. Regression Coefficients for Sample of 50 Diverse Firms, 1956-1963 - Determinants of the Eamings- Price Ratio .................................................................• ................ 28 4.1. Institutional Holdings of NYSE-Listed Stocks .... 65 4.2. Difference in Insider Ownership of Firms in Several Asset Size C lasses ................................................. 72 4.3. Variation of Selected Economic Indicators During "Typical" Business Cycle, 1945-1960 .......................... 85 4.4. Resume of Variables of the M odel ..................................... 90 5.1. Number of Stocks Comprising the Universe and Reasons for Exclusion, by Industry ................................. 97 5.2. Market Value Distribution of Firms in the Sampling U n iv e r s e ........................................................................................ 101 5.3. Degree of Proportionality of the Sam ple ......................... 103 5.4. The Sample Corporations and Approximate Price- Earnings Ratios at Year-End 1966 .......................... 105 v i TABLE Page 6.1. Sources of Data ............................................................................ 110 6.2. Comparison of Simple and Weighted Averages of th e DJIA........................................................................................... 117 7.1. Distribution of Sample Firms According to Variability of P-E Ratio ........................................................... 128 7.2. Values of the Environmental Variables ........................... 130 7.3. Variability of Sample Values of the Internal M e a s u re s ....................................................................................... 131 7.4. Analysis of Variance - Distribution of W = Log (P/E)................................................................................................ 142 7.5. Goodness-of-Fit Table - W - Log (P/E) Versus Standard Normal .......................................................................
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