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THE EFFECT OF OWNERSHIP STRUCTURE ON THE PRICE EARNINGS RATIO — RETURNS ANOMALY

Abstract

Prior studies document the systematic tendency for firms with low price to earnings ratios (LPE) to earn higher stock returns and firms with high price to earnings ratios (HPE) to earn lower stock returns, in both the United States and in international markets (Campbell & Shiller, 2001; Capaul, Rowley, & Sharpe, 1993; Fama & French, 2002). In this study, we provide evidence that suggests insider ownership alters this relation. That is, when insider ownership is high, companies with low (high) price to earnings ratios earn lower (higher) stock returns. Similar results are obtained for operating performance; in the year following valuation, earnings decrease for high insider ownership-low price to earnings (HIO-LPE) firms and increase for high insider ownership-high price to earnings (HIO-HPE) firms.

Material Code

PBM_ff29P

Reference

Anderson, K., & Brooks, C. (2006). The long-term price earnings ratio. Journal of Business Finance and Accounting, 33, 1063-1086. Barber, B. M., & Lyon, J. D. (1997). Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. Journal of Financial Economics, 43, 341-372. Basu, S. (1977). Investment performance of common stocks in relation to their price to earnings ratios: A test of the efficient market hypothesis. Journal of Finance, 32, 663-682. Bhabra, G. S. (2007). Insider ownership and firm value in New Zealand. Journal of Multinational Financial Management, 17, 142-154. Boyle, G., Carter, R. B., & Stover, R. D. (1998). Extraordinary anti - takeover provisions and insider ownership structure: The case of converting savings and loans. Journal of Financial and Quantitative Analysis, 33, 291-304.

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