1.1.3. Earning price ratio (EPR) and debt to equity ratio (DER) Factors
In addition to the three factors previously discussed, however, others argued that the following two factors significantly affect the ERs: the earning price ratio (EPR) and the debt to equity ratio (DER). Basu (1977) indicated that the EPR impact should be included as an effective variable when explicating the ER. The author tested more than 1400 firms on the NESE for 15 years. The results proved that the average rate of yearly returns on the high earning price portfolio was 9.34%; the average rate of yearly returns on the low earning price portfolio was …show more content…
Hypothesis of overreaction
Two different perspectives disagree that the size of the firm and the BTMR should be included as main variables in explicating the ER. The first perspective explicates why small stocks, as well as high BTMR stocks, beat the market by using the behavioural principles of the stock. For instance, Lakonishok, Shleifer and Vishny (1994) indicated that the size of the firm and BTMR cannot be proxies of risk. Accordingly, the TFM cannot be utilised to explicate the return of stocks. They tested the stock returns for five years by utilising the NYSE stocks imported from the COSTAT and the CRSP. They discovered that the best returns on value stocks were caused by increasing amendments in predicting the rate of future growth. The authors explicated that the BTMR and the size of the firm impacts were the result of the systematic error of the method that practitioners utilised to predict future of stock returns.
2.1.3. Hypothesis of characteristics
Another perspective that believes that the size of the firm and the BTMR should not be used to explicate the stock return argues that the characteristics of both factors affect the asset returns. Daniel and Titman (1997) pointed out that no further variables existed during their examination of the U.S. Stock Market from 1973 to