Some popular interpretations of E/P ratios have been an earning capitalization rate (Graham et al., 1962), an indicator of mis-priced stocks (Basu, 1977 and Jaffee et al., 1989), an indicator of transitory earnings (Beaver and Morse, 1978), and a risk measure (Ball, 1978). Recent academic evidence documents that changes in earnings and profitability are to some extent predictable (Lev, 1969; Freeman et al...
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Similar evidence are also found in Indonesia (Assih, 1999; Werdiningsih, 2001; and Febriyanti, 2004). Fama and French (2000) document that earnings tend to be mean reverting. Large increases in earnings are followed by subsequent decreases, while large decreases are followed by increases. The changes in earnings tend to reverse from one year to the next, and large changes of either sign reverse faster than small changes...
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