Do Valuation (P/E, ROE and P/BV) Ratios Drive Stock Values? A Case of GCC Countries

Abstract

Do valuation ratios predict the future stock prices? Over the decades, researchers have explored data across various global financial markets and across different timelines to seek its unique answer. The results though were not universal, resulted in generating greater interest in the subject. Using valuation ratios as a stock price predictor gained further momentum after Campbell and Shiller’s seminal work involving a century of data sets. In spite of its practical relevance, not much effort was being made to establish the correlation between valuation ratios and stock price of GCC listed companies. This paper attempts to bridge the existing gap by studying 140 publicly listed companies in the six GCC countries namely Qatar, Kuwait, Bahrain, Saudi Arabia, Oman and United Arab Emirates (UAE) using the multiple regression model. The period of study was between 2013-2017. Correlation is established for each of the countries individually, followed by an integrated approach. The independent variables used in the study are Price Earnings Ratio (P/E), Return on Equity (ROE), Price to Book Ratio (P/BV) and Stock Returns being the dependent variable.