Assessment of the correlation between price-earnings ratio and stock market returns of universal banks in the Philippines

  • Antonio Jaramillo Dayag University of Santo Tomas
  • Fernando Trinidad
Keywords: P/E Ratio, Stock Returns, Stock Price

Abstract

Universal banks are important economic drivers in the Philippines since they provide the financial backbone for businesses and investments. Universal banks comprise 90% of the country’s banking system resources. Eleven [11] of the twenty-one [21] universal banks in the country are listed in the Philippine Stock Exchange, and these banks are the top universal banks based on capitalization. Price to Earnings Ratio [PER] is a commonly utilized investment assessment tool and this ratio indicates how much investors are willing to pay for a stock and is calculated as the ratio of the stock price over earnings per share. Since the stock price is dictated by the stock market, this paper seeks to determine if the P/E ratio of universal banks in the Philippines is correlated to its stock returns, the implication of which is how to form an appropriate balance between stock price volatility and banks’ valuation. The paper uses panel data of the 11 listed universal banks from 2010 to 2018, using Pearson Correlation. The study resulted in a generally weak correlation, however, there were banks that exhibited strong, positive, significant correlation.

References

Ali, M. (2017). Movement of PE ratio and its impact on price fluctuations: a case study of Dhaka Stock Exchange in Bangladesh. Global Journal of Management and Business Research, 17(1), 1-9.

Arslan, M. (2014). Impact of dividend yield and price earnings ratio on stock returns: A study on non-financial listed firms of Pakistan. Research Journal of Finance and Accounting, 5(19), 68-75

Baek, C., & Lee, I. (2017). U.S. Stock Market P/E ratios, structural breaks and long-term stock returns. Journal of Business Economics and Management, 19(1), 110-123. doi:https://doi.org/10.3846/16111699.2017.1409263

Banarjee, A. (2019). Predicting stock return of UAE listed companies using financial ratios. Accounting and Finance Research, 8(2), 214-225. doi: 10.5430/afr.v8n2p214

Bangko Sentral ng Pilipinas Website. http://www.bsp.gov.ph/banking/pbs_new/12.htm

BSP. (2016). The Philippine Banking System. http://www.bsp.gov.ph/downloads/Publications/2016/StatRep_2Sem2016b.pdf

Bhargava, V., & Malhotra, D. (2006). Do price-earnings ratio drive stock values? The Journal of Portfolio Management, 82-96.

Fun, L.P., & Basana, S.R. (2012). Price earning ratio and stock return analysis (evidence from Liquidity 45 stocks listed in Indonesia Stock Exchange). Jurnal Manajemen Dan Kewirausahaan, 14(1), 7-12

Gacheri, N. (2014). The relationship between price earnings ratio and stock return of firms listed at the Nairobi Stock Exchange. Thesis. University of Nairobi

Hillier, D., Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2010). Corporate finance. London: McGraw-Hill Higher Education.

Kumar, P. (2017). Impact of earnings per share and price earnings ratio on market price of share: a study on auto sector in India. International Journal of Research – Granthaalayah, 5(2), 113-118. doi: https://doi.org/10.5281/zenodo.345456

Llanto, G., & Rosellon, M. (2017). What determines financial inclusion in the Philippines? Evidence from a national baseline survey. Philippine Institute for Developmental Studies. <https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/pidsdps1738.pdf>

Mussalam, S. (2018). Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(2), 101-116. doi:https://doi.org/10.17015/ejbe.2018.021.06

Oxford Business Group. (2018). The outlook of the Philippine banking sector remains strong, with robust credit growth and ongoing reforms. https://oxfordbusinessgroup.com/overview/stable-expansion-robust-credit-growth-and-ongoing-reforms-contribute-positive-sector-outlook

“Pearson’s Correlation”. Statstutor. http://www.statstutor.ac.uk/resources/uploaded/pearsons.pdf

Sezgin, F. H. (2010). An empirical investigation of the relationship among P/E ratio, stock returns and dividend yields for Instanbul Stock Exchange. International Journal of Economic and Finance Studies, 2(1), 15–23.

Singh, D. (2018). Stock price determinants: empirical evidence from Muscat Securities Market, Oman. Intechopen, 21-31. doi:http://dx.doi.org/10.5772/intechopen.77343

Thalmann, G.-L. (2016). The Performance of SPI Stocks in Relation to their P/E Ratios. Zurich University of Applied Sciences, 1-45.

Wagdi, O., Sherif, A., & Azmy, M. (2015). The correlation between common stock return and price earnings ratio [PER]: Egypt case. SSRN. 1-7. doi: http://dx.doi.org/10.2139/ssrn.2783852

Published
2019-08-18
How to Cite
Dayag, A., & Trinidad, F. (2019). Assessment of the correlation between price-earnings ratio and stock market returns of universal banks in the Philippines. International Journal of Research in Business and Social Science (2147- 4478), 8(5), 172-181. https://doi.org/10.20525/ijrbs.v8i5.481
Section
Articles