Cross-Sectional PEG Ratios, Market Equity Premium, and Macroeconomic Activity

• Autores: Xiaoquan Jiang, Qiang Kang
• Localización: Journal of Accounting Auditing and Finance, ISSN-e 2160-4061, ISSN 0148-558X, Vol. 35, Nº 3, 2020, págs. 471-500
• Idioma: inglés
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• Resumen

  • This article explores the information content of PEG ratios (price/earnings to growth ratios) for future aggregate returns and economic fundamentals. We first establish an analytic link between PEG ratios and time-varying expected returns of stocks. We then combine the link with empirical asset pricing models to extract market-wide information from cross-sectional PEG ratios. The resultant cross-section estimates of the risk premiums on stock betas serve as proxies for market-wide information. The proxies contain salient information about future market equity premiums and macroeconomic activity both in-sample and out-of-sample. Moreover, the proxies outperform aggregate PEG ratios and the cross-section beta-premium estimate based on conventional valuation ratios and retain incremental power in forecasting future market equity premiums. The results are robust to using various econometric methods for standard error adjustments.