A study on the effect of P/E and PEG ratios on stock returns: Evidence from Tehran Stock Exchange

Abstract

This paper studies the effect of the ratios of P/E and PEG on stock returns of the firms accepted on Tehran Stock Exchange. The study uses regression and Pearson Correlation Coefficient based on the performance of 138 firms over the period 2004-2009 according to the Iranian calendar to investigate the effects of P/E and PEG on stock returns. The study also uses the models originally proposed by Chahin and Choudhry (2010) [Chahin, S., & Choudhry, T. (2010). Price to earnings, growth radio and value growth based strategies. Social Science Research Network, 19(4).] to discuss the strategies of investing on stocks. The results show that the ratio of P/E had more effect on stock returns than the ratio of PEG and stocks returns had a direct relationship with P/E and an inverse relationship with PEG. In addition, the returns of growth stock were more than value stock.