Date of this Version

12-18-2008

Document Type

Conference Proceeding

Publication Details

Published Version.

Kelly, S., McClean, J., & McNamara, R. (2008). The low P/E effect and abnormal returns for Australian industrial firms. Paper presented at the 21st Australasian finance and banking conference, Sydney, Australia.

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© Copyright Simon Kelly, Jenna McClean & Ray McNamara, 2008

Abstract

While the low P/E effect has been examined rather extensively in international markets particularly in the US, there is a notable absence of Australian market-based P/E studies. This research examines the relationship between the investment performance of Australian Industrial common stock and their P/E ratios in an attempt to uncover potential for a P/E based trading strategy. The excess and differential returns of P/E ranked portfolios containing 1310 Industrial firms over a 9 year period (January 1998 to December 2006) are examined. The results show the existence of a low P/E effect in the Australian capital market. Furthermore, the superior returns of low P/E stocks increase when a consensus of two business failure prediction models is applied to the portfolio of low P/E stocks. The statistically significant risk-adjusted returns afforded to hypothetical investors over the sample period (up to 12% per annum), not only provide support for a P/E based trading strategy, but also suggest a violation of the semi-strong form of the Efficient Market Hypothesis.