Nexus between Price Earnings (P/E) Ratio and Financial Performance of Commercial Banks: Dynamic Panel Evidence from Bangladesh

Abstract

This paper aims to reveal the relationship between the determinants of financial performance and stock performance measured with reference to the Price-Earnings (P/E) ratio. It examines Panel Data of 10 years covering from 2010 to 2019 of seven Private Commercial Banks (PCBs) of Bangladesh enlisted in the Dhaka Stock Exchange (DSE). Several hypotheses and econometric models have been estimated with the Pooled Ordinary Least Squares (Pooled OLS), Generalized Least Squares (GLS), Fixed-effect, and Random-effect, followed by various diagnostic tests to examine the validity of the models selected for this study. Finally, the One-step Generalized Method of Moments (GMM) method has been adopted. The empirical investigation shows that among the entire set of the variables, only the Net Profit Margin (NPM) ratio has a significant impact on the P/E ratio under Random-effect, GLS, and Pooled OLS. Finally, the model developed for the One-step GMM method has revealed that the inclusion of the Lagged P/E ratio, Leverage, NPM ratio, Net Interest Margin (NIM) ratio, Asset Utilization Ratio, and Non-Performing Loan (NPL) ratio have a statistically significant dynamic impact on the P/E ratios of the PCBs. However, the Liquidity ratio and the Loans to Asset ratio divulged no statistical significance under any of the estimated models.This paper aims to reveal how determinants of financial performance affect the stock performance measured with Price-earnings ratio of the commercial banks enlisted in Dhaka Stock Exchange considering Panel Data of 10 years covering from 2010 to 2019 of seven private commercial banks of Bangladesh listed with DSE. Several hypotheses along with econometric models estimated with the Pooled OLS, GLS, Fixed-effect, Random-effect, and finally, One-step GMM method have been adopted followed by various diagnostic tests to examine the validity of the models selected for this investigation. The empirical investigation shows that, among the entire set of variables only Net Profit Margin ratio has significant impact on the P/E ratio under Random-effect, GLS and Pooled-OLS. Finally, the model developed for One-step GMM method has revealed that including lagged P/E ratio, the Leverage, NPM ratio, NIM ratio, Asset Utilization Ratio, and NPL ratio have statistically significant dynamic impact on the Price-earnings ratios of the commercial banks. However, liquidity ratio and Loans to Asset ratio divulged no statistical significance under any of the aforesaid models.