A QUANTITATIVE STUDY OF P/E RATIO IN THE MALAYSIAN MARKET

PRESENTERS: NORHAFIZAH BINTI AHMAD (2009475496) ROSMIZIE BIN MOHAMED (2009690284)

Outline Presentation
Chapter 1 - Introduction Chapter 2 Literature Review Chapter 3 Research Methodology Chapter 4 Results Chapter 5 Conclusion & Recommendation

BACKGROUND OF THE STUDY

P/E ratio of individual stocks has the ability to explain cross sectional variation in stock return (Fama and French:1992) P/E ratio have been used by investors and stock analysis in determine the individual stocks are price accordingly. There are not many research doing on the determination factors of P/E ratio especially in Malaysia

cont.
Aim of this research is to determine the most factors that effects the price earning ratio in Malaysia The independent variable was divide into two major scope that are macro variables (effects on whole industries) and micro variables (effects each industriesindividually)

PROBLEM STATEMENT
Measure the relationship between Independent variable (Macro and Micro) and Dependent Variables (Price Earning Ratio) in the Malaysian market Examine which of the variables give impacts to each industries in Malaysia.

OBJECTIVE OF THE STUDY

Do macro factors gave an impact on P/E Ratio? Do micro factors gave an impact on P/E Ratio? Is there have determinants differs across industries in Malaysia?

LIMITATIONS
Time Constraints Data analysis-basis Accuracy and Reliability of data

CHAPTER 2: LITERATURE REVIEW

Dependent Variable (P/E Ratio)

Supported/Related Studies Statements

Basu (1983)

P/E Ratio can be used to construct portfolios which outperform the market. P/E Ratio is an indicator of mispriced stocks
Employs analytical framework to relate market price of equity to capitalized earnings Investigate variables that may explain some of the cross sectional variation in P/E Ratio among US firms The differences in expected growth are commonly offered as major explanations for differences in P/E Ratio. P/E ratio is an earning growth indicator

Ohlson (1983)

Beaver and Moose (1978),Zarowin (1990)

Beaver and Moose (1978),

Cragg and Malkiel (1982), Litzenberger and Raul (1971)

RELATIONSHIP BETWEEN INDEPENDENT VARIABLE (MACRO + MICRO WITH THE DEPENDENT VARIABLE (P/E RATIO

Independent Variable Macro Relationship Gross Domestic Products (GDP)) Inflation Rate Significance Mixed Previous studies (LR) Pearce (1983) (Insignificance) Fisher (1930),Nelson et al (1993),Boudoukh et al (1994),Bodie (1976),Jafee and Mandelker (1976) (Significance) Solnik (1974),Cagan (1974) Interest Rate Insignificance Micro Expected Growth of Dividend Mixed (Insignificance) Beaver and Morse (1978), Alford (1992),Kane et al (1996) (Significance) Zarowin (1990),Allen and Cho (1999),Basu (1983),Cook and Rozeff (1984),Fama and French(1992) Required Rate of Return Dividend Yield Significance significance Bodie, Kane, Marcus (2007),Jones (2000) Gordon (1962)-model Darby (1986),Koraczyk (1985)

CHAPTER 3: RESEARCH & METHODOLOGY

DATA COLLECTION AND DATA SOURCES

SECONDARY DATA:
DataStream Malaysian Statistic Department (website)

Bank Negara Malaysia (website)

STATISTICAL METHOD OF ANALYSIS Analyze the panel data by using statistical software (E-Views)

LIST OF SAMPLE
CONSUMER GOODS
BONIA AJINOMOTO MAMEE DD MFM PADINI

CONSTRUCTION
MUHIBBAH ENGINEERING A.ZAKI RESOURCES BINAPURI HOLDINGS GAMUDA SUNWAY

BANKING & FINANCIAL AFFIN BANK BIMB PUBLIC BANK CIMB ALLIANCE

HEALTHCARE KPJ LATEXX FABER GROUP APEX RUBBERREX

SERVICES MESINIAGA NATIONWIDE PLUS EXPRESSWAY POS MALAYSIA SENIJAYA

SAMPLING
Measurement Period: 10 years (20002009)-annually basis Number of Industry: Five (Consumer Goods, Construction, Banking and Financial,Healthcare,Services) Number of company: Five company on each industries

Research Framework
DEPENDENT VARIABLE

PRICE EARNINGS RATIO (PER)

INDEPENDENT VARIABLE (MACRO)

GROSS DOMESTIC PRODCTS (GDP) INFLATION RATES INTEREST RATES

INDEPENDENT VARIABLE (MICRO)

DIVIDEND YIELD EXPECTED GROWTH OF DIVIDEND REQUIRED RATE OF RETURN

HYPOTHESIS
Hypothesis 1 H0: Macro factors does not impact on P/E Ratio H1: Macro factors does impact on P/E Ratio Hypothesis 2 H0: Micro factors does not impact on P/E Ratio H1: Micro factors does impact on P/E Ratio Hypothesis 3 H0: Macro and Micro factors does not differ with across industries H1: Macro and Micro factors does differ with across industries

DATA ANALYSIS METHOD

PANEL DATA -FIXED EFFECT -POOL EFFECT CORRELATION COEFFICIENT COOFICIENT OF DETERMINATION (R2)

T-stat

P-value

DW stats

Chapter 4: Results
Descriptive Analysis Summary of Result Individual Effect Pool Effect

Descriptive Analysis
YR LPE LGDP 0.7189 0.7160 LIR 0.4834 0.4771 LINF 0.3263 0.2232 LGR -0.6829 0.000000 LRR 0.9502 0.8222 LDY -0.4501 -0.5376 Mean 2004.528 1.1269 Median 2004.500 0.9852

Maximum 2009.000 2.1367

0.9345

0.5798

0.7324

0.9031

2.7694

0.5563

Minimum 2000.000 1.6736

0.5229

0.3032

-1

-0.1761

-1.9582

-0.0899

Std. Dev. 2.870896 18.13906 2.073168 0.558507 1.468081 0.735656 39.57955 0.403280

Skewness 0.001100 2.235621 -0.868390 -0.498074 0.848848 5.858563 12.71878 2.666291 Kurtosis 1.772485 14.19868 4.079969 2.354750 3.247978 56.57034 188.2309 23.29723

Summary of results
INDUSTRY constant GDP IR INF GR RR DY R2 Adj R2 DW
Consumer Goods 1.430928 (0.4281) Construction sectors 6.604957 (0.8169) Banking & Finance 12.44450 0.093843 (0.0162)** 0.401431 (0.6323) 0.974148 0.353607 (0.1731) 1.700445 (0.0185)*** 3.559677 0.135914 (0.0333)** 0.571458 (0.1862) 1.392993 1.213661 (0.0060)*** 4.442028 (0.7227) 2.711456 0.003707 (0.3749) 0.190834 (0.5062) 0.081011 2.395079 (0.1750) 4.417605 (0.0580) 10.04026 0.266 0.078 2.130 0.673 0.583 2.291 0.530 0.410 2.045

(0.0925)
Healthcare 4.810575 (0.0635)

(0.3342)
0.367638 (0.5208)

(0.5049)
1.443093 (0.8146)

(0.7356)
0.519745 (0.5034)

(0.8638)
0.836936 (0.7961)

(0.7629)
0.077995 (0.7094)

(0.0213)**
4.568251 (0.9467) 0.380 0.217 1.640

Services

15.26746 (0.3642)

0.998320 (0.3161) 0.249477 (0.2604)

4.155706 (0.7850) 0.902793 (0.9882)

1.385399 (0.1426) 0.353082 (0.3453)

2.668614 (0.2069) 1.399206 (0.0079)***

0.427340 (0.1371) 0.006845 (0.6758)

3.875112 (0.0000)*** 2.503290 (0.0001)***

0.748

0.684

1.633

Pooled

3.354477 (0.0138)***

0.353

0.326

1.413

= standard error , p-value in parenthesis ( ) ***The coefficient is statistically significance at 1% level

** The coefficient is statistically significance at 5% level

Individual Effect (Industry)

Consumer Goods Construction Banking and Financial Healthcare Services

Consumer goods
Significance variable (p-value): Expected Growth of Dividend, Inflation Rate and GDP

R determination: moderate confidence relationship between IV and DV

Durbin Watson stat: closer to 2- less autocorrelation occur

cont..
Correlation Coefficient :Interest Rate, Expected Growth of Dividend (strong positive linear relationship) GDP(weak positive linear correlation), Inflation Rate (weak negative linear correlation)Required Rate of Return, Dividend Yield (strong negative linear correlation) Fixed Effect Testing - significance

Construction
Significance variable (p-value): Interest Rate R determination: moderate confidence relationship between IV and DV Durbin Watson stat: closer to 2- less autocorrelation occur

MEASUREMENT INDICATOR
Method
Panel Data-Redundant Fixed Effect Test Correlation of determination (R) P-value <0.05 (significance) Closer to 1: good Less than 0.5:poor/low confidence

Correlation Coefficient (r)

r=1:perfect positive linear correlation 0.75<r<1: strong positive linear correlation 0<r<0.25: weak positive linear correlation r=0: no linear correlation -0.25<r<0:weak negative linear correlation -1<r<-0.75:strong negative linear correlation r=1: perfect negative linear correlation
p-value <0.01 (1%) or 0.05 (5%) - significance

P-value

DW stat

:DW=2 (no autocorrelation occurs) :closer to 2 (less autocorrelation occurs) :1>DW<2 (less autocorrelation occursevidence of positive linear correlation)
* Analyze by using P-value

T-stat

cont..
Correlation Coefficient :Interest Rate, Dividend Yield (strong positive linear relationship) GDP(weak positive linear correlation),Required Rate of Return(weak negative linear correlation Inflation Rate, Expected Growth of Dividend(strong negative linear correlation) Fixed Effect Testing - significance

Banking and financial

Significance variable (p-value): Dividend Yield R determination: low confidence relationship between IV and DV Durbin Watson stat: closer to 2- less autocorrelation occur

cont..
Correlation Coefficient :Inflation Rate, Dividend Yield, Expected Growth of Dividend (strong positive linear relationship) Required Rate of Return(weak positive linear correlation)GDP,Interest Rate(strong negative linear correlation) Fixed Effect Testing - significance

Healthcare
Significance variable (p-value): None R determination: low confidence relationship between IV and DV Durbin Watson stat: less autocorrelation occur (evidence of positive serial correlation)-less than 2,more than 1

cont..
Correlation Coefficient :Interest Rate, Dividend Yield, (strong positive linear relationship) Expected Growth of Dividend, GDP (weak positive linear correlation) Required Rate of Return (weak negative linear correlation) Inflation Rate (strong negative linear correlation) Fixed Effect Testing - significance

Services
Significance variable (p-value): Dividend Yield R determination: high confidence relationship between IV and DV Durbin Watson stat: less autocorrelation occur (evidence of positive serial correlation)-less than 2,more than 1

cont..
Correlation Coefficient :GDP (perfect positive linear relationship) Expected Growth of Dividend, Dividend Yield (strong positive linear relationship) Inflation Rate, Required Rate of Return (strong negative linear correlation) Interest Rate (perfect negative linear correlation) Fixed Effect Testing - significance

Pool Effect
Significance variable (p-value): Expected Growth of Dividend and Dividend Yield R determination: Low confidence relationship between IV and DV Durbin Watson stat: less autocorrelation occur (evidence of positive serial correlation)-less than 2,more than 1

cont..
Correlation Coefficient :Dividend Yield, Expected Growth of Dividend (strong positive linear relationship) GDP, Interest Rate, Required Rate of Return (weak positive linear correlation)and Inflation Rate (strong negative linear correlation)

Summary of Findings
Independent Variable Macro Relationship (Assumption) Gross Domestic Products (GDP) Inflation Rate Mixed (Negative) Fisher (1930),Nelson et al(1993),Boudoukh et al (1994),Bodie (1976),Jafee and Mandelker (1976) (Positive) negative positive Pearce (1983) negative Previous studies (LR) Result (Findings)

Solnik (1974),Cagan (1974)

Interest Rate negative Darby (1986),Koraczyk (1985) negative

Cont.
Micro Expected Growth of Dividend Mixed (Negative) Beaver and Morse (1978), Alford (1992),Kane et al (1996) (Positive) Positive

Zarowin (1990),Allen and Cho

(1999),Basu(1983),Cook and Rozeff (1984),Fama and French(1992) Required Rate of positive Bodie, Kane, Marcus negative

Return
Dividend Yield positive

(2007),Jones (2000)
Gordon (1962)-model positive

Chapter 5: Conclusion and Recommendations

1st objectives: Do macro factors gave an impact on P/E Ratio? 2nd objectives: Do micro factors gave an impact on P/E Ratio?

Our Findings: The result shows that only two of the independent variables (Expected Growth of Dividend and Dividend Yield ) have a

significance relationship with Dependent Variable. Both of that variables

are micro factors, so, in Malaysian market only micro factors gave an impacts on P/E Ratio while macro factors does not give impacts at all. However, in micro factors only required rate of return insignificance.

3rd objectives: Is there have any determinants differ across industries in Malaysian?

Our Findings: The result shows that each industry in Malaysian market have different variables that effects the P/E Ratio. However, the

healthcare industry showed that none of the variables was affected P/E
ratio. This is unique case because others industry at least have one the significance variables.

Recommendations
Future studies should: Continue studies to explore the determination factors of P/E ratio in another variables (ex: risk, market value,etc) Apply this area of study (P/E ratio) in another market (country/region) and choose more numbers of industries Deeply examine on issue of why certain industry not have significance variable in determine P/E Ratio. Example in our study: Healthcare Industry Extend the study in this area and get most significance variables to determine P/E Ratio.

&