Price-to-Book Ratios
Intheearliersection,wenotedthatprice-to-bookratiosare
heavilyinfluencedbyreturnsonequity.InJanuary2006,we
regressed the price-to-book ratio against the fundamentals
identified in the preceding section—the return on equity
(from themostrecent financialyear),thepayout ratio,the
beta,andtheexpectedgrowthrateoverthenextfiveyears
(from analyst forecasts).
TheregressionhasanR-squaredof55.6percent,asignificant
improvement on the P/E and PEG ratio regressions. The
returnonequityisclearlythevariablethathasthestrongest
relationshipwiththeprice-to-bookratio,asevidencedbythe
high t-statistic on the coefficient. Every 1 percent
improvement in returnincreases theprice-to-book ratio by
0.176.
Thestrongpositiverelationshipbetweenprice-to-bookratios
andreturnsonequityisnotuniquetotheUnitedStates.In
fact,Table8.13summarizesregressionsforothercountriesof
price-to-bookagainstreturnsonequityrunatdifferentpoints
intime.Ineachofthemarkets,firmswithhigherreturnson
equityhavehigherprice-to-bookratios,thoughthestrengthof
therelationshipisgreater inPortugalandIndiaandlessin
Greece and Brazil.
TABLE8.13 Price-to-BookRatios and Returns onEquity:
Market Regressions