Quantitative Value Research: E/P or Size Effect?
Earnings Yields, Market Values, and Stock Returns
- Jaffe, Keim and Westerfield
- A version of the paper can be found here.
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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.
- 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.
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Definitions of common statistics used in our analysis are available here (towards the bottom)