The Return-Stages Valuation Model and the Expectations within a Firm's P/B and P/E Ratios

Financial Management, Vol. 30, Iss. 2, Summer 2001

Posted: 5 Sep 2001

See all articles by Morris G. Danielson

Morris G. Danielson

Saint Joseph's University - Department of Finance

Thomas D. Dowdell

North Dakota State University

Abstract

The return-stages model can quantify the expectations facing a firm from its price-to-book (P/B) and price-to-earnings (P/E) ratios. We illustrate two implications of the model. First, a firm's P/B and P/E ratios can predict the future cash flow pattern earned by a firm. Second, the operating performance consistent with a given stock return differs across four groups of firms: Growth Firms, Mature Firms, Turnaround Firms, and Declining Firms. Our results imply that a firm's stock return depends, in part, on how its operating performance compares to the expectations defined by its P/B and P/E ratios.

Suggested Citation

Danielson, Morris G. and Dowdell, Thomas D., The Return-Stages Valuation Model and the Expectations within a Firm's P/B and P/E Ratios. Financial Management, Vol. 30, Iss. 2, Summer 2001, Available at SSRN: https://ssrn.com/abstract=275544

Morris G. Danielson (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

Thomas D. Dowdell

North Dakota State University ( email )

Department of Accounting & Information Systems
Minard Hall
Fargo, ND 58105
United States

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