Cross-Sectional PEG Ratios, Market Equity Premium, and Macroeconomic Activity
25th Australasian Finance and Banking Conference 2012
Journal of Accounting, Auditing and Finance, 35(3), 2020, 471-500
43 Pages Posted: 29 Aug 2012 Last revised: 9 Nov 2021
Date Written: August 27, 2012
Abstract
This paper explores the information content of PEG 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.
Keywords: PEG Ratios; Analysts’ Forecasts; Predicting Market Equity Premium; Predicting Macroeconomic Activity; Out-of-Sample Forecasting
JEL Classification: E17; E44; G12; G14; G17; M40; M41
Suggested Citation: Suggested Citation