Earnings Yields, Market Values, and Stock Returns

Core Idea:

At this time, there was significant dispute in academia as to whether the value premium was perhaps due to the size effect.

The paper attempts to disentangle the anomaly of earnings to price ratio (or “P/E”) from that of firm size; it examines the relation between the stock returns and E/P and size effects, using a longer sample (from 1951 to 1986) than previous research and investigating January and non-January months separately.

Alpha Highlight:

  • The core finding is that size is primarily a seasonal effect, and thus that the E/P effect was not fundamentally driven by size.
  • Note below how the coefficients on both E/P and size are significant in January, but only the E/P coefficient was significant outside of January. 
2014-10-03 18_00_42-0Value Reseach Recap.pptx - Microsoft PowerPoint (Product Activation Failed)


The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

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