Determinants of Price to Earnings Multiple around the World. Recent Findings

This article deals with the functioning of capital markets, notably the impact of financial crisis on earnings’ pricing rationality. Through a global market based analysis it intends to test the effects of dividend ratios and other fundamentals on P/E multiple, in order to show some recent useful evidences. Starting from a classic theoretical premise (SHV Dividend Discount Model), the article sets out some consequent hypotheses and develops a linear multivariate econometric model to detect (for major quoted companies from US, Australia / New Zealand / Canada, Europe, Japan and Emerging Markets) the actual role of the most important relative valuation multiple determinants during a ‘critical period’. Indeed, the analysis refers to 2010, a peculiar year (immediately after the explosion of the Global Financial Crisis) which shows signals of both a weak recovery and a persisting uncertainty. Our findings, likely due to some distortions created by the crisis aftermath, do not fully confirm the SHV-DDM theoretical conjectures about the above said determinants. While the conjectured negative association between P/E and dividend yields seems to be confirmed, the positive association between P/E and payouts does not. Other relevant indicators (risk, roe/growth, leverage and corporate tax rate) are considered in the empirical model as control variables to complete the exploratory analysis. In sum, the paper may appear timely to ascertain the extent of the first and leading effects of the recent global crisis on the rational earnings’ pricing models.