Predicting Earnings Growth Using E/P Ratios: Australian Evidence

Abstract

The classic ‘higgledy‐piggledy growth’ studies by Little (1962), Rayner and Little (1966), Brealey (1967), and Lintner and Glauber (1967) essentially reported that earnings changes over time appear to be randomly distributed. More recently Fuller, Huberts and Levinson (1992) have undertaken a US study which challenges some of these earlier findings. Their study utilised the earnings‐to‐price ratio as the market's implicit forecast of future earnings changes. Their results suggested that high E/P stocks tend to have relatively lower earnings changes whilst low E/P stocks tend to have higher earnings changes.

This study reworks Fuller, Huberts and Levinson's study on a sample of 207 listed Australian companies for the period 1972–1984. On balance, our results support their findings.

Keywords

E/P RATIOS FORECASTING EARNINGS CHANGES

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