Common Stock Appraisal in Relation to Their Price-Earning Ratios Using Risk- Adjusted Measures: An Emerging Market Perspectiv

In this paper, an attempt was made to determine empirically the relationship between investment performance ofequity securities and their P/E ratios using risk-adjusted measures. While the efficient market hypothesis deniesthe possibility of earning excess returns, the price-earnings hypothesis highlighted that P/E ratios, due toexaggerated investor expectations, may be indicated of future investment performance. The study used 83 ofJordanian Companies listed on Amman Stock Exchange (ASE), one of the emerging markets, and observed themonthly returns of these firms over the period ◌ِApril 1996- March 2004. This issue has not yet been subjected todirect empirical investigation at the emerging markets such as ASE, which provides the importance of this study.After adopting the Augmented Dickey-Fuller Unit Root for testing the satisfying stationarity assumption,Ordinary Least Squares (OLS) regression results suggest that gaining abnormal return is a function of changes inPortfolio’s P/E over the period considered. The study, therefore, supports the hypothesis that the P/E hasimportant implications for portfolio’s performance, a result supporting the rejection of the semi-strong level ofefficiency for ASE