Price/Earning Effect Anomalies (Efficient Market Hypothesis)

Price/Earning Effect Anomalies (Efficient Market Hypothesis): "My summary for you"

PART: 4

This formula proves that how much money Investors have to pay for one unit of expected earnings.

And the formula is as below exactly:

Price / Earning Rate = Share Costs / Share Earning = P / E

Especially, Investors accept to pay more for profit per share of the enterprises which have high growth potential and brilliant future. Therefore, rate will be high. Rate will be changed Not only the company's profit increased but also increased or decreased demand for the company's share in the stock market as publicized.

S. Basu tried to define the relation between Price/Earning Rate and Stocks Returns as practical in one of his investigation in 1977. Efficient Market Hypothesis diverges from low Price/Earning Rate portfolios’ high return and higher systematic risk level in contradistinction to Capital Market Theory and Theory of Financial Asset Revaluation.

S. Basu investigated stock returns of the trading companies and relationship between firm majority and Price/Earning Rate at New York Stock Exchange in 1983. After then he proved that shares of minor firms provide significantly higher returns than shares of major firms. In his same research, majority effect almost disappeared completely when it is taken under control distinctions of returns, risk and Price/Earning Rate, was found.

In lots of expressions related with majority effect, it has been proposed to minor companies which have more (high) yield than major companies due to their higher risk basically.