Decomposition of Earnings-to-Price (E/P) Effect

Abstract

Saleh (2007) employed the Fama and French (1993) three-factor model to investigate the ability of earnings-to-price (E/P), amongst other measures, to explain the cross-sectional stock returns over the period 1980-2000. Inconsistent with previous research, Saleh concluded that the loading of SMB and HML factors is not significant and, thus, he tried to explain these findings by using a multi-factor model.

This paper aims to expand Saleh’s (2007) work and thus seeks to explore the earnings-to-price (E/P) performance by decomposing the E/P effect into two components; financial effect and operational effect. The results confirm that SMB and HML factors captured some variation in stock returns that is not captured by the market return.