PER and Growth. Empiricist Evidence

Price Earnings Ratio (PER) and Growth
In the last section we were able to see the relation between the PER and growth.

From the formulated knowledge we deduced:

  • If the interest rate goes up the PER will go down.
  • If the risk premium the investors ask for goes up, the PER goes down.
  • If the growth expectations increase, the PER goes up.

We also saw that the growth affect the PER a lot – when it goes up or down – when the interest rates are low (around 4% - 5%).

Now we will try to prove if this theory of the stock exchange really does occur, in other words, if this type of equation really works or not. We have already seen also that it does work as far as the interest rates; but does the PER also take into account the growth?