Firm Fundamentals, Market Conditions, and P/E Ratios: Cross Industry Insight from Bangladesh

Firm Fundamentals, Market Conditions, and P/E Ratios

Abstract

This study examines the key determinants of the price-to-earnings (P/E) ratio in Bangladesh’s capital market, focusing on firm-specific, non-financial, and macroeconomic variables. A sample of 81 non-financial companies from 13 industries, representing 69% of the non-financial equity market and 53% of the total market capitalization, is analyzed using descriptive statistics, correlation matrices, and panel data techniques. After addressing model specification issues using the Panel Corrected Standard Errors (PCSE) model, the findings reveal that asset size and return on equity (ROE) have a significant positive effect on the P/E ratio, while the dividend payout ratio (DPR) and industry average P/E ratio (IAPE) exert a significant negative influence. The study highlights notable industry-level differences, with free float percentage significantly impacting P/E ratios in sectors such as Cement, Fuel & Power, IT, and Telecom. Overall, firm-level financial and non-financial indicators are more influential than macroeconomic factors in determining P/E ratios in Bangladesh.

Keywords: Price Earnings ratio (P/E), Panel data analysis, Firm-Specific Factors, Non-financial indicators, Macroeconomic factors, Bangladesh Capital Market

JEL Codes: G30, G11