Quantitative Value Research: E/P or Size Effect?

Quantitative Value Research: E/P or Size Effect?

October 6, 2014 Research Insights, Value Investing Research
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(Last Updated On: January 18, 2017)

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)
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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.