Abstract

Price/Earnings (P/E) ratio, a well known assessment method, has constantly remained at the centre of awareness of market analysts and investors ever since the origin of discounted dividend growth model of Gordon and Shapiro (1956). In line with that, this study aims to reveal the variables that explain the variation in P/E ratio, a proxy of the confidence index, by using unbalanced pooled cross-sectional time series Ordinary Least Square (OLS) regression model on Amman Stock Exchange listed companies for the period 1999-2013. Financial sector firms’ and non-consistently dividends-paying firms were excluded resulting in 1380 firm-year observation. Results implied that dividend payout ratio, earning growth rate, Tobin’s Q and firm size significantly clarify variations in confidence index of firms listed in ASE, demonstrating that investors’ confidence of investing in ASE is more for small company with higher dividend payout ratio, high earning growth rate and high firm’s market value. This paper is likely to help decision makers to assess variables that can clarify contrast in company’s P/E ratio in order to gain investors’ confidence and thus choose these companies to be a part of their portfolio.

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