Relationship between monthly price-earnings ratio and stock value in the industrial sector of the Philippine Stock Exchange for the period 2009-2013

• Main Authors: Chan, Jennica, Tan, Heidi, Tangara, Dianne
• Format: text
• Language: English
• Published: Animo Repository 2015
• Subjects: Price-earnings ratio > Philippines; Stock exchanges > Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/9733
• Institution: De La Salle University

This study aims to test the hypothesis that price-earnings (P/E) ratio can predict the future stock prices in the Philippines from the period 2009-2013. Focusing on the industrial sector of the Philippine Stock Exchange (PSE), this study makes use of fifty four (54) companies listed in the Philippine Stock Exchange industrial index (IND). Using the vector autoagression (VAR) model, this paper aims to find the relationship between the movement of monthly price-earnings (P/E) ratio and the subsequent monthly stock prices. The study first makes use of the Pearson's correlation coefficient test to determine the correlation between the said variables. Following this, the Durbin-Watson statistics is employed to check for the presence of autocorrelation in the error terms, while Breusch-Pagan/Cook-Weisberg test is used to check for heterocedasticity. Testing for unit root in the variables is done with augmented Dickey-Fuller test. If the series are found to be non-stationary and with the presence of unit roots, testing for cointegration for each variable using the Johanssen cointegration test is conducted while applying the vector error correction model (VECM) to the time series. Finally, the study determines whether price-earnings (P/E) ratio Granger causes stock prices or vice versa by employing Granger causality test. Based on the results of the tests, the series are found to be stationary and without any presence of unit roots. Hence, the Johansen cointegration test and the vector error correction model (VECM) were not used in the study. Moreover, there appears to have a weak positive correlation between the variables. The overall findings showed that the movement in P/E ratio does not Granger cause the movement in stock prices for the industrial sector of the PSE. Instead, the change in stock prices was found to Granger cause the change in P/E ratios. Thus, this study determines that the change in the P/E ratios can be considered as a vital indicator of the movement in stock prices but not as a predictor.