Application of fundamental multiples in capital asset pricing. An empirical verification on the Polish market (1998-2004)

Abstract

The aim of the paper is the empirical verification of fundamental multiples as capital asset pricing tools for the companies listed on Warsaw Stock Exchange. Three multiples are examined: earnings to price, operating cash flow to price and book value to equity. In the first step, the fundamental multiples are examined in terms of their ability to explain expected returns. In the second step, the company’s capitalization as a size proxy is added to the set of explanatory variables. The methodology is based on Fama and French [2], with necessary adjustments. The research is carried on monthly data for 1998-2004 for companies listed on Warsaw Stock Exchange. The results do not support the proposition that fundamental multiples adequately explain expected returns. It seems that relations between firms’ returns and their multiples which are well documented for Western equity markets do not hold for companies listed on Polish stock exchange.