RE-EXAMINING THE EXISTENCEOF LOW PRICE-EARNINGS RATIO EFFECTS:A Descriptive Approach to the Case of Indonesian Stock Market

From practical point of view, Price-Earnings (PIE) 1(1110 is one of numerous important aspects to consider. Ancrl�Sts, investors, and traders in stock markets use PIE ratio �together with other information- in analyzing the past performance, and ffedictingthefunrre prospect of securities in the market. However, noting its importance, there are some significant disagreements among researchers regarding the ability of PIE ratio in providing "correct information" about the Panic return of company stocks. One of the topics under discussiem is about the presence also-called low PIE dad, which hypothesizes that high P/E trill be followed by /ow retta-ns and /ow P/E will be followed by high returns. This study, by repealing partially Johnson et al. (1989) procedures. was trying to confirm the low P/E effect hypothesis in Indonesian market. The study involved 267 stocks listed in Jakarta Stock Exchange in the sample frante and selected the period of 1994-2000 as thefocus afarralvsis. The study also has an intention to investigate whether there was a structural change in return-PIE relationship front the pre-crisis period (1994-1996) to the crisis period (1998-2000). The procedure of analysis was divided into Iwo sections, In the first section a descriptive macro (market) analysis was presented, to test the hypothesis at the market level. It started with an overview about the fluctuation and trend of market P/E ratios during the period of 1991-2000, and followed by investigating the relationship between market PIE and the following returns. A regression analysis 11Y1S also performed to strengthen the analV.ViS from statistical point of view. In the second section, analysis is more directed to the portfolio level where the portfolios were ranked according to their PIE ratios. The study11115 concluded with a train finding that does not support the low PIE cued hypothesis. Keywords: low p/c effect price-((ruin!' rati