Does the price multiplier effect also hold for stocks?

TL;DR

This paper demonstrates that the price multiplier effect, previously observed in other assets, also applies to stocks when using the price-dividend ratio to measure intrinsic price, especially among homogeneous company samples.

Contribution

It introduces the use of the price-dividend ratio as an intrinsic measure to test the price multiplier effect for stocks, confirming its validity in this context.

Findings

The price multiplier effect holds for stocks when using the price-dividend ratio.

The effect is observable in samples of sufficiently homogeneous companies.

Stocks exhibit risk-prone investor behavior during speculative peaks.

Abstract

The price multiplier effect provides precious insight into the behavior of investors during episodes of speculative trading. It tells us that the higher the price of an asset is (within a set of similar assets) the more its price is likely to increase during the upgoing phase of a speculative price peak. In short, instead of being risk averse, as is often assumed, investors rather seem to be ``risk prone''. While this effect is known to hold for several sorts of assets, it has not yet been possible to test it for stocks because the price of one share has no intrinsic significance which means that one cannot say that a stock $ A $ is more expensive than a stock $ B $ on the basis of its price. In this paper we show that the price-dividend ratio gives a good basis for assessing the price of stocks in an intrinsic way. When this alternative measure is used instead, it turns out that the price multiplier effect also holds for stocks, at least if one concentrates on samples of companies which are sufficiently homogeneous.