Basu (1977, 1983) found that firms with high P/E ratios
A) earned higher average returns than firms with low P/E ratios.
B) earned the same average returns as firms with low P/E ratios.
C) earned lower average returns than firms with low P/E ratios.
D) had higher dividend yields than firms with low P/E ratios.

Question

Quizplus · Accepted Answer

Basu's research indicated that firms with high Price-to-Earnings (P/E) ratios actually earned lower average returns than firms with low P/E ratios, challenging the conventional wisdom that higher P/E ratios always indicate better investment opportunities.

Basu (1977, 1983) Found That Firms with High P/E Ratios