Thethirdchoiceistouseamultiplethatcanbecomputedfor
allofthefirmsinthegroup.Theinverseoftheprice-earnings
ratio,whichiscalledtheearningsyield,canbecomputedfor
allfirms,includingthoselosingmoney,andisnotexposedto
the same biases as the price-earnings ratio is.
Time Variation in Multiples
Asanyinvestorwhohastrackedthemarketforanylengthof
timeknows,multipleschangeovertimefortheentiremarket
andforindividualsectors.Toprovideameasureofhowmuch
multiples can change over time, we have computed the
averageandmedianP/Eratioseachyearfrom 2000 to 2005
fortheUnitedStatesinTable7.2.Inthelastcolumn,wenote
thepercentageoffirms intheoverall sampleforwhich we
wereabletocomputeP/Eratios.Notethatthebeginningof
2000 wasthepeakofthemarketbubbleandthehighvalues
for the P/E ratios attest to this.
TABLE 7.2P/E Ratios across Time: U.S. Stocks
Whydomultipleschangeovertime?Someofthechangecan
beattributedtofundamentals.Asinterestratesandeconomic
growthshiftovertime,thepricingofstockswillchangeto
reflecttheseshifts;lowerinterestrates,forinstance,playeda