Pitabas Mohanty

Earnings Per Share:: Its Forecasting and Relationship with Stock Returns Pitabas Mohanty

A survey of the way equity research is being done in India revealed that analysts mainly use the P/E approach to value the stock. The most difficult part of equity research is also found to be the largely unpredictable nature of P/E ratio. This book attempts to answer the question of whether excess return can be earned by forecasting EPS alone. Using a Logit-based forecasting model, Ou and Penman (1989) have shown that excess return can be obtained by forecast¬ing the direction of movement of EPS in the US capital market. A similar study done here for the Indian stock market shows that one can obtain excess return by forecasting the direction of movement of the EPS. In the second part of the book, an attempt has been made to empirically test APT in India. However, it is found out that none of the factors seem to be priced in India. This may either mean that the sample size is too small to do any meaningful test of APT. It may also mean that the APT does not work in the Indian context.