TheP/Eratioismuchmoresensitivetochangesinexpected
growthrateswheninterestratesarelowthanwhentheyare
high.Thereisapossiblelinkbetweenthisfindingandhow
marketsreact whenfirms announceearnings.Whena firm
reportsearningsthataresignificantlyhigherthanexpected(a
positive surprise) or lower than expected (a negative
surprise),investors’perceptionsoftheexpectedgrowthrate
for this firm can change concurrently, leading to a price
effect.Wewouldexpecttoseemuchgreaterpricereactions
for a given earnings surprise, positive or negative, in a
low-interest-rate environment than you would in a
high-interest-rate environment.
Thereisoneotherdimensiononwhichwecanexaminethe
effectofhighgrowth,andthatisthrough thelengthofthe
growthperiod(whileholdingtheexpectedgrowthratefixed).
Inotherwords,whatifthefirm,insteadofmaintainingan 18
percentgrowthrateforthenextfiveyears,wasabletodoso