Price-to-Sales Ratios
To examine differences in price-to-sales ratios across
companies in the market, we use the variables that we
identified in the previous section as its determinants—the
expectedgrowthinearningspershare,thepayoutratio,the
beta,andthenetmargin(againfromthemostrecentfinancial
year):
The R-squared on the regression is 58.4 percent and the
samplesizeis1,877firmswithdataavailableonallofthe
independent variables. There are two troublesome
componentstothisregression.Thefirstisthatthecoefficient
on beta has the wrong sign—riskier firms have higher
price-to-salesratiosinthisregression,whereasourprediction
would be that theyshould have lower. (Weexplained the
reasonsforthiswhenwetalkedaboutprice-earningsratios).
Thesecondisthattheinterceptisalargenegativenumber,
whichbyitselfisnotuncommon,butcanresultinnegative
predicted price-to-sales ratios at least for some firms.