Abstract
This study examines the empirical relationship between the price-to-earnings (P/E) ratio and returns on the common stock of NZSE firms. The results show a substantial difference in raw returns between low P/E and high P/E stocks, and between negative earnings and high P/E stocks. However, once returns are adjusted for risk, using both the Capital Asset Pricing Model and the alternative model put forward by Fama and French (1993), the difference in returns among our P/E stocks becomes insignificant. Our findings, therefore, suggest that there is no P/E effect in New Zealand.