Price Earnings Ratio and Stock Return Analysis (Evidence from Liquidity 45 Stocks Listed in Indonesia Stock Exchange)

Pei Fun Liem, Sautma Ronni Basana


Price to Earnings Ratio (PE Ratio) has been broadly used by analysts and investors for stock selection. Stocks with low PE ratio are perceived as having cheaper current price hence expected to generate higher return in subsequent period. This paper aims to examine predictability of stock return using PE Ratio based on historical relationship between PE Ratio and subsequent stock return. Particularly, it seeks to find whether stocks with high PE Ratio followed by low stocks return and on the contrary, stocks with low PE Ratio followed by high stocks return. Using stocks which are included as member of Liquidity 45 and observation period 2005-2010 as samples, results show that there is significance difference between low PE and high PE portfolio stock return in short term (holding period of 6 months) but there is no significance difference between both portfolio stock return if they are hold for one, two, three, and four years. This research also finds that there is no significant relationship between stock return and (trailing) PE Ratio which suggests that (trailing) PE Ratio is not useful in estimating both short term and long term stock returns


price to earnings ratio, stock selection, stocks return

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The Journal is published by Management Study Program, Faculty of Business and Economics, Petra Christian University. It available online supported by Directorate General of Higher Education - Ministry of Research, Technology and Higher Education of the Republic of Indonesia.

©All right reserved 2016.Jurnal Manajemen dan Kewirausahaan, ISSN: 1411-1438, e-ISSN: 2338-8234

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