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\title{Movement of PE Ratio and its Impact on Price Fluctuations: A Case Study of Dhaka Stock Exchange in Bangladesh}
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             \author[1]{Md Ashraf  Ali}

             \affil[1]{  The Millennium University}

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\date{\small \em Received: 10 December 2016 Accepted: 31 December 2016 Published: 15 January 2017}

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\begin{abstract}
        


This study describes the movement of PE ratio mentioned in corporate annual reports and impact on market price fluctuations in stock market. Specifically, this report discovers the affiliation between PE ratio and market price fluctuation in stock market in an emerging market like Dhaka stock Exchange, Bangladesh. For this purposes, it has analyzed and utilized a disclosure index about PE to measure the extent of relation with market fluctuation made by companies in corporate annual reports. This study reports that a very few company?s share price in DSE are making efforts to run with PE ratio which are mostly quantitative in nature. Whether the price earnings ratio is a good criterion on which to base investment decisions is also examined in this report.

\end{abstract}


\keywords{price earnings ratio, price fluctuation, dhaka stock exchange, emerging market, earning per share.}

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\let\tabcellsep& 	 	 		 
\section[{Introduction}]{Introduction}\par
n recent years investments in equities have surged manifold. This evident from the fact that a large number of stocks have been enrolled in the Dhaka Stock Exchange in the last few years as well as from the significant increase that has taken place in the daily turnover of the market. With the entry of foreign institutional investors in Dhaka Stock Exchange coupled with stronger activity of domestic financial institutions and the arrival of private mutual funds; the erstwhile rule of stock picking has matured from speculation to research base investment. There is an increased awareness about the need for investment analysis is looking at various parameters in assessing the performance of corporate in the stock market.\par
Dhaka Stock Exchange has been shown greater volatility which has affected the informational efficiency of DSE. The Dhaka Stock Market has been experiencing volatility since its inception-the indices reached the highest level in its history in November 1996 and December 2010 and eventually crashed; afterwards investors lost their confidence about the stock market.\par
Different researchers have inquired on various side i.e; R Vaidyanathan and Ranadev Goswami  {\ref (1997)} show the affiliation between PE and stock returns. Pu  {\ref Shen (1998)} talks about the PE ratio (2010) research on the affiliation between P/E Ratio, Dividend Yield Ratio, Size and Stock Returns in Jordanian Companies: A Co-integration Approach. It is generally originated to be convenient to identify a single indicator which can be used to reflect the changes in the underlying fundamentals pertaining to scrip. Equity researchers are however divided in their opinion regarding the single parameter which represents the fundamental of scrip and hence EPS, RONW, P/BV or P/E ratio etc. are used for this purpose. 
\section[{a) Hypothesis}]{a) Hypothesis}\par
The following hypothesis was set in order to achieve the research objective. H1: There is no significant relation between the P/E ratio and price fluctuation of stock. 
\section[{II.}]{II.} 
\section[{Methodology}]{Methodology}\par
This research is based on P/E ratio of a specific date and stock price fluctuation for a specific. The methodology of the overall work is as under.\par
Researcher followed the procedure for the sampling. It facilitates of accounting data accesses which is most reasonable and standardized information. The genesis of the sample was the Dhaka Stock Exchange (DSE) industry wise company list. There were total 500 companies among which 221 are Treasury bond which are not traded in market. So it is handpicked 100 companies from 279 companies randomly.\par
For completing the study secondary data and primary data were utilized. For secondary data collection, companies annual report, daily trading price of stock and DSE general index, Dhaka stock exchange's library was used. Dhaka stock exchange's web site was also used to collect companies yearly performance data. For primary data oral questioned were asked to investor about P/E ratio.\par
For data analysis, Karl Pearson's coefficient of correlation has been used to find out the affiliation between the P/E ratio and stock price fluctuation. This analysis is made without concentrating and group of the company. For regression analysis, P/E ratio has been used as the independent variable, price fluctuation a dependent variable. Other calculation like: Mean, standard deviation, covariance etc were done as well. Two tailed hypothesis test done to test the presumed hypothesis. 
\section[{III.}]{III.} 
\section[{Objectives of the Study}]{Objectives of the Study}\par
General objective of the study are to specify the affiliation between P/E ratio and market price fluctuation. Other objectives of the study are: 1. To know the nature of P\textbackslash E ratio 2. Interducing with individual company P/E and overall market P/E. 3. Price volatility of individual company. 4. Confidentiality of P/E ratio. 5. Measure the efficiency of Dhaka stock Exchange.\par
IV. 
\section[{Significance of the Study}]{Significance of the Study}\par
This research is remarkable is various aspects. First of all, it will pave the easy way for investors to identify the nature of P/E ratio and market price fluctuation along with help them to take decision regarding investment . Secondly, future researcher would be able to extend the research by including other indicators. Furthermore, it will help government or authorized department like, SEC, CSE, DSE, Board of Investment etc. to understand the role of P/E ratio is stock market.\par
V. 
\section[{Limitations of the Study}]{Limitations of the Study}\par
The limitation confronted while conducting the research were:\par
? The scope of the report is limited to only hundred companies listed in DSE without any grouping. ? Availability of information was limited for which data of only one year has been incorporated. 
\section[{VI.}]{VI.} 
\section[{Literature Review}]{Literature Review}\par
Recent research in empirical finance has shown that variables like dividend yields, price to earnings (P/E) ratios as well as past returns have significant explanatory power for the variation in cross section of expected returns even after controlling for market risk (Fama and French, 1992, for a through coverage of the topic). Similar results are reported for several developed markets (Ferson and Harvey, 1997, Fama and French, 1998) as well as emerging markets (Bekaeet,et. Al., 1997; Claessens, Dasgupta and Glen, 1998; Rouwenhorst, 1999). Whether these variables are risk proxies in an efficient market or signs of mispricing is the subject an ongoing debate in financial economics. Yet for the practitioner in the market, it is the longer term predictive ability, rather than contemporaneous explanatory power , that is really important .\par
R vaidyanathan \& Ranadev Goswami (1997), said the price earnings ratio is the single most popular tool for equity valuation . The inherent simplicity in understanding its significance has made it particularly popular among ordinary investors. The investment analysis also gives P/E ratio its due importance before making investment decision and for timing the entry into or exists from a stock. Base (1997) showed how the price earnings ratio that is computed from reported accounting earning can be used to select that have good price appreciation potential. His analysis showed that stocks with low P/E ratio earned risk adjusted rate of return that beat the returns earned by a naïve buy and hold strategy. The price /earnings ratios of Japanese firms are known to be higher than of other countries. In addition apart from forecasting individual stock returns stock market investors are also interested in the forecasting power of market wide averages of variables like dividend yield/E and book to market ratios as tools in market timing in highly volatile stock markets. The objective of this paper is to investigate the ability of P/E ratios to predict future stock market volatility in emerging equity markets. Emerging markets are differentiated from developed markets with respect to their heterogeneous nature and inherent dynamics. These are the markets characterized by high volatility and high average returns. It has been shown that they are not integrated to the developed markets of the world as evidenced by very low correlation with the rest of the world and among them  {\ref (Bekaert ET. Al.1998}). Hence the importance of market time and country selection for an internationally diversified portfolio investor is obvious. Bleiberg (1994) employs aggregate data for future stock returns and average P/E ratio to develop a market timing and asset allocation strategy. To this end, he groups historical average P/E ratios into quintiles and relates them with future returns using S\&P 500 index. \hyperref[b6]{Bierman (1991)} points out that P/E of Japanese firms are considerably overstated because of widespread reciprocal ownership in Japan. In his opinion, when large amounts of common stock are held by corporations and when dividend payout are low as is common in Japan, P/E can be substantially inflated. Another study by Ikeda M (1992), however, claims that such upward biasness of P/E ratio is not necessarily due to crossholding alone. Instead, the P/E adjustment process should take into account different levels of scale, earning and payout ratios that are interconnected by different degrees of reciprocal ownership. Some researchers have should that P/E ratio is a combination of present and future growth rate.\par
Leibowitz and Kogelman (1992) establish that the P/E ratio of a firm wi9th not franchise value gives the base P/E which is simply the reciprocal of the market capitalization rate. in contrast, the P/E of a firm with substantial franchise opportunities will command a premium to the base P/E. The author later  {\ref (1994)} shown that the current growth rate of a firm although greater than market average, not in excess to its expected franchise opportunities. On the other hand, high earning derived from franchise opportunities which in turn pull down the P/E value. Hence, firm's valuation will be able to maintain higher P/E ratio.\par
Evans  {\ref (19993)} finds that the usual stock market 20-which says the P/E ratio plus the inflation rate should equal 20-no longer holds true. He suggests that the rule might have lost its validity and many are trading at much higher P/E ratios, but there still exist some fundamental affiliation between the yield on stock and bonds. Several attemps have also been made to find the effect of firm size and earnings/price ratio in relation to equity return. Basu (1997) claims that earning/price ratio subsumes the size in sample specific cases. Another study by Reinganum (1981) originated that size subsumes the earning/price ratio due to fortuitous choice of methods.\par
Cook and Rozff (1984) late examined the join effect of size and earning/price ratio and their findings suggest that both effects are at work. i. e. one is not subsumed by another as alameda by previous work. A more study by fama \& French (1992) provided even greater support for this ratio as a measure of relative value. The purpose of the study was to examine alternative variable that would explain the cross-section of the rates of return on common stock. One of the explanatory variables was the well known beta coefficient. Their results did not provide much support for beta as an explanatory variable but the results did reveal that both size of the firms and the ratio of book value to market value of equity were significant explanatory variable but the result did reveal that both size of the firms and the ratio of book value to market value of equity were significant explanatory variables. They also contended that the book to market value ratio was the single most important variable.\par
Penam  {\ref (1996)} in his study explain that the P/E ratio indicates the future growth in earning which is positively correlated to expected future return on equity and negatively related to current return on equity. Empirical evidence indicates differential P/B ratios but not P/E ratios expect in the extreme. Current return on equity is not good indicator of P/E since a given level of P/E can be associated with alternative combinations of current and future return on equity vaidyanathan \& Ranadev Goswami 1997 researched that the investment in low P/E stocks on an average will give higher return than in higher P/E stocks. They have considered 60 active scrip's listed on Bombay stock exchange for period 1991-1997.They also said that the annual average return of the portfolios formed on the basis on P/E ratios is not significantly different from each other. They also originated that even these risk adjusted returns are not significantly different for different portfolios formed on the basis of P/E ratios. Pu shen 2000 when price earnings ratios have been high stock prices has usually grown slowly in the following decade. Moreover at tomes such as the present when high price earnings ratios have reduced the earnings yield on stocks relative to interest rates stock prices have also tended to grow slowly in the short run. Forecasts based on such evidence are subject to much uncertainty, however, because history may not repeat itself. Specifically, the possibility cannot be ruled out that this time will be different due to fundamental changes in the economy that will allow high price-earnings ratios to persist and thus stock prices to continue growing both in the near term and in the coming decade.\par
Fama and French (1988) and Campbell and Shiller (1998, 2001) use, in addition to P/E, the dividendyield in order to predict future market returns. Shiller  {\ref (2000)} indicates that P/E ratios that are high relative to their long -run historical average signal "irrational exuberance" in the stock market are usually followed by sell-offs and low future return. Thus, the P/E ratios has a tendency to revert back to its long-run historical mean. Kane, Marcus and noh (1996) used the P/E ratio as a proxy for the required rate of return and find it to beinversely related to volatility. This support the notion that investors are risk-averse. Since asset return exhibit volatility clustering;i. e. "large changes then to be followed by large change of either sign, and small changes tend to be followed by small changes" [see mandelbrot  {\ref (1963, p. 418)}] large increases in current volatility entail higher volatility in the future. Consistent with the above mentioned studies, high (low) P/E ratios relative to their long-run hitoricsal mean lead to lower (higher) future market returns. Thus, when investors exprct higher future volatility, they will sell their current position (leading to a drop in P/E)/ and wait until expected returns rise in the future to compensate them for the risk. This paper examines the relation between P/E and volatility using several measures for each. Kane et al (1996) findings suggest a negative relation between P/E and volatility. Dimitros koutmos (2010) originated that P/E can serve as an important market valuation tool. Since it is significantly related to volatility, it embodies information regarding investor' expectation for future market condition and future return. Secondly , although the long-term interest rate has been suggested as a proxy for the investment opportunity set [see Merton  {\ref (1973)}, empirical findings provide weak support of this.\par
Mona Al -Mwalla, Ahamad M. Al-Omari, Fayssal Ayad (2010) research indicates the existence of long run equilibrium between dividend yield, P/E ratio, size and stock' return for the simple under study. This research got out the connection between average P/E for company remain alive under Dhaka stock exchange for the year ended 2009 and convert in market share price for one year from 15-10-2010 to 15-10-2011. Correlation analysis along with other examination between them worked hard to explore out whether there exist any coordination between them or not. simple companies in Bangladesh has been scrutinized and discoursed. The second phase focuses on top and bottom level companies listed from several paradigms under Dhaka stock exchange. Third season explored the correlation analysis. Forth debated on Result of Regression analysis. The final stage engrossed on Test of hypothesis. 
\section[{a) Disclosure level by the sample companies in Bangladesh}]{a) Disclosure level by the sample companies in Bangladesh}\par
This section focuses on the measurement and analysis of the extent of P/E ratio and share price fluctuation in Dhaka stock Exchange. In most of the studies reviewed, a disclosure index was prepared in order to measure the extent of P/E ratio and share price fluctuation in the annual reports of the companies under study. Mean, Standard deviation, Maximum, minimum occurred in individual companies are given below in the table. From the table it is found that mean of P/E ratio is lower than that of market price variation. But if we into the maximum and minimum P/E ratio both are higher than market price fluctuation.\par
In table 2, P/E ratios of companies have been scrutionized. For analysis, P/E ratio has been classified into ten categories from 0 to 100 In the table, it has been found that maximum companies are Lying in scale of 11 to 20.99 (which in number is 30) and they occupy 30\% of the total examined companies. 27 companies are standing capturing 27\% of total in scale of 21 to 30.99. Least number of companies is seen in the scale bith in 71-80.99\&81-90.99. So from the table it can be assumed in DES that most of the companu,s P/E ratio ratio are higher than 117Lower than 50.99.\par
Table \hyperref[tab_2]{3} shows sample companies according to price fluctuations in the last one year ended 15-10-2011. The change is shown in percentage. Form the above table, it is clear that in the last one year most of the company's share price has changed significantly.27 companies are standing in the scale of 31 to 40.99 which occupies 27 of the total companies. 17 companies are standing in the scale 21 to 30.99. Least number of companies is situated in the highest scale and in lowest scale, which means market share price change is in moderate stage. 
\section[{VIII. Top and Least Ranked Companies}]{VIII. Top and Least Ranked Companies}\par
The simple companies were ranked on the basis of P/E ratio \& market price fluctuation of each company. Table  {\ref 4} shows the top ranked companies by the size of P/E index. These provide insights about which company are capturing low P/E and which having high P/E. This table indicates that the lowest P/E in Bangladesh was obtained by South East Bank ltd. None of the top ranking companies are subsidiaries of multinational companies. Further, when these companies were classified into industrial categories. It was found that six of them came from the "Bank" category.\par
Table  {\ref 4}: Ranking of the companies based on the lowest P/E ratio Table \hyperref[tab_3]{5} presents the highest P/E OF seven companies in Bangladesh using the percentage of change in share price. The lowest scores were obtained by Bangas Ltd and Metro Spinning Ltd. In the table it is originated that in highest P/E ratio there are two companies from "Insurance" category. It is interesting to note that in highest P/E ratio eight companies are different categories. For normal investors it may be seen that Bangas Ltd is the most risk companies for investment but it may not be true all times. In table-7, companies are categorized in order of their price fluctuation. It is Libra infusion whose share price has changed the largest among the samples during last year (86.95\%). In the table, it can be found that seven companies are from "insurance \& finance" sector in high price fluctuation category. So it also can be derived that financing and insurance companies have high share price fluctuation rate. On the basis of above mentioned table and chart it is explored that the highest price fluctuation incurred in Finance sector. The last was in mutual funds. It is to note here that lest P/E was captured by banks though price fluctuation is much high 47.68\% for the same. This indicates that P/E ratio has no influence on price fluctuation. 
\section[{IX. Conclusion and Test of Hypothesis}]{IX. Conclusion and Test of Hypothesis}\par
Since the computer value to Z test is 0.80 (hypothesis), which is less than the table value (1.96 at 5\% level of significant), the hypothesis is accepted. This indicates that there is no significant relation between the P/E ratio and stock price fluctuation. 
\section[{X.}]{X.} 
\section[{Recommendations}]{Recommendations}\par
? Capital market is not a casino. Investors should evoke that is a logistic investment place. ? Necessary tidings before sorting investment in stock must be curbed. They should not travel and panic with rumor. ? Investor running out from short run investor should invest for long term to gain profit. ? It should not be recognized as a profession as some investors do. It must be ancillary of profession.\par
PE ratio must not be considered as only single parameter for investment. Other parameters lilke EPS.\par
Dividend payout ratio, book to market price and price statistics may also be judged.\begin{figure}[htbp]
\noindent\textbf{1} \par 
\begin{longtable}{P{0.09444444444444444\textwidth}P{0.7555555555555555\textwidth}}
P/E\tabcellsep Market price fluctuation\end{longtable} \par
 
\caption{\label{tab_0}Table 1 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{2} \par 
\begin{longtable}{P{0.4667630057803468\textwidth}P{0.14248554913294798\textwidth}P{0.2407514450867052\textwidth}}
P/E ratio range\tabcellsep No of companies\tabcellsep \% of companies\\
0-10.99\tabcellsep 6\tabcellsep 6\%\\
11-20.99\tabcellsep 30\tabcellsep 30\%\\
21-30.99\tabcellsep 27\tabcellsep 27\%\\
31-40.99\tabcellsep 16\tabcellsep 16\%\\
41-50.99\tabcellsep 10\tabcellsep 10\%\\
51-60.99\tabcellsep 4\tabcellsep 4\%\\
61-70.99\tabcellsep 3\tabcellsep 3\%\\
71-80.99\tabcellsep 1\tabcellsep 1\%\\
81-90.99\tabcellsep 1\tabcellsep 1\%\\
91-100.99\tabcellsep 2\tabcellsep 2\%\end{longtable} \par
 
\caption{\label{tab_1}Table 2 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{3} \par 
\begin{longtable}{P{0.48315789473684206\textwidth}P{0.1386842105263158\textwidth}P{0.2281578947368421\textwidth}}
Price fluctuation scale (\%)\tabcellsep No of companies\tabcellsep \% of companies\\
0-10.99\tabcellsep 2\tabcellsep 2\%\\
11-20.99\tabcellsep 10\tabcellsep 10\%\\
21-30.99\tabcellsep 17\tabcellsep 17\%\\
31-40.99\tabcellsep 27\tabcellsep 27\%\\
41-51.99\tabcellsep 20\tabcellsep 20\%\\
51-60.99\tabcellsep 10\tabcellsep 10\%\\
61-70.99\tabcellsep 10\tabcellsep 10\%\\
71-80.99\tabcellsep 2\tabcellsep 2\%\\
81-90.99\tabcellsep 2\tabcellsep 2\%\\
91-100.99\tabcellsep 0\tabcellsep 0\%\end{longtable} \par
 
\caption{\label{tab_2}Table 3 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{5} \par 
\begin{longtable}{P{0.5678137651821862\textwidth}P{0.18582995951417006\textwidth}P{0.09635627530364373\textwidth}}
Name of companies\tabcellsep P/E ratio\tabcellsep Ranking\\
Bangas Lit\tabcellsep 98.11\tabcellsep 100\\
Metro Spinning Lit\tabcellsep 94.8\tabcellsep 99\\
Janata Insurance Lit\tabcellsep 82.32\tabcellsep 98\\
Aziz Pipe Lid\tabcellsep 78.6\tabcellsep 97\\
RAK Ceramics ltd\tabcellsep 67.29\tabcellsep 96\\
BD Auto cars Ltd\tabcellsep 66.29\tabcellsep 95\\
Desh Geramics Ltd\tabcellsep 63.14\tabcellsep 94\\
BSC Ltd\tabcellsep 61.22\tabcellsep 93\\
MJL BD Ltd\tabcellsep 59\tabcellsep 92\\
Pragati insurance Ltd\tabcellsep 58.13\tabcellsep 91\end{longtable} \par
 
\caption{\label{tab_3}Table 5 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{-} \par 
\begin{longtable}{P{0.5628378378378378\textwidth}P{0.21824324324324323\textwidth}P{0.06891891891891892\textwidth}}
Name of companies\tabcellsep Price Fluctuation\tabcellsep Ranking\\
Dhaka insurance\tabcellsep 0\tabcellsep 1\\
Islami Bank Ltd\tabcellsep 10\tabcellsep 2\\
THE ibn SINA Ltd.\tabcellsep 11.26\tabcellsep 3\\
Reneta Ltd\tabcellsep 12.06\tabcellsep 4\\
Bangas Ltd\tabcellsep 12.89\tabcellsep 5\\
golden son Ltd\tabcellsep 14.63\tabcellsep 6\\
national tea Ltd\tabcellsep 15\tabcellsep 7\\
Bata shoe Ltd\tabcellsep 16.22\tabcellsep 8\\
MJL BD Ltd\tabcellsep 16.55\tabcellsep 9\\
BAT BC Ltd\tabcellsep 18.67\tabcellsep 10\end{longtable} \par
 
\caption{\label{tab_4}Table - 6}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{10} \par 
\begin{longtable}{P{0.85\textwidth}}
Sector\end{longtable} \par
 
\caption{\label{tab_5}Table 10 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{11} \par 
\begin{longtable}{P{0.5173913043478261\textwidth}P{0.33260869565217394\textwidth}}
Sector\tabcellsep Price fluctuation (\%)\\
Banks\tabcellsep 35.17\\
Insurance\tabcellsep 47.68\\
Engineers and power\tabcellsep 36.18\\
Pharamaccuticals\tabcellsep 32.40\\
Garments\tabcellsep 40.26\\
Chemicals and others\tabcellsep 37.62\\
Network finance\tabcellsep 40.835\\
\tabcellsep 61.40\end{longtable} \par
 
\caption{\label{tab_6}Table 11 :}\end{figure}
 			\footnote{( ) 2017 © 2017 Global Journals Inc. (US) 1} 		 		\backmatter  			 \par
If companies is done among all the figures it can be found that the companies having highest or lowest P/E ratio have no affiliation with share price fluctuation. There is one company bangas Ltd. Whose P/E was high but we see that it has low price fluctuation rate. Most of the investors of our country invest on the basis of P/E ratio. But from that analysis it is found that P/E ratio has no affiliation with price fluctuation. 
\subsection[{a) Correlation analysis}]{a) Correlation analysis}\par
To examine the correlation between the independent and dependent variables, person correlation coefficients (r) were computer. A correlation matrix of all the values of r for the explanatory variables along with the dependent variables was constructed and is reported. The person product-moment coefficients of the correlation between P/E ratio and share price. From the above table it is originated that there is no significant affiliation between P/E ratio \& market price fluctuation. The affiliation between them is near to no affiliation. So it can be said that P/E ratio doesn't indicate anything about future price fluctuation. 
\subsection[{b) Regression Analysis}]{b) Regression Analysis} 
\subsection[{Analysis of P/E \& Price fluctuation on sector base:}]{Analysis of P/E \& Price fluctuation on sector base:}\par
Companies listed under DSE have been categorized under different sector. Here sector wise analysis was done to identify whether P/E ratio and price fluctuation have any affiliation or not. 
\subsection[{For further research}]{For further research}\par
? This study evolves over a single year (I.E. 20009).\par
Additional research can be commenced to gauge the extent of liaison between them. Such a study would provide additional insights in scrutinizing P/E for investment. ? This study concentrates not on any particular industry type. Next research can be commenced based on particular industry type (e.g. the pharmaceutical industry and textile industry in Bangladesh). ? Research also contained only 100 companies further research can be designed considering more companies. ? Affiliation between two factors is considered here.\par
Other factors like EPS, profitability margin, and dividend yield can be practiced in upcoming researches.			 			  				\begin{bibitemlist}{1}
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\end{document}
