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Abstract

This paper empirically investigates, in an emerging market, the functional form of the relation between earnings and stock prices under an option-based equity valuation framework. We use in the regression and panel analyses a sample data of 226 Iranian manufacturing firms listed on Tehran Stock Exchange (TSE) for the period of 1991 to 2004. Employing after-tax earnings and beginning-of-year equity book value, both on a per share basis and deflated by the General Customer Price Index, we provide graphical and statistical weak evidences on the convex form of price-earnings relation and contributes in the market-based accounting literature.

Keywords

• Abandonment Option
• Book Value
• Convexity
• earnings
• Equity Valuation