Wan-Ting Wu

The forward E/P ratio and earnings growth

Valuation theories predict a negative relation between the earnings-to-price (E/P) ratio and future earnings growth, but prior studies have produced conflicting results. Using a growth measure that incorporates loss firms, this paper shows that the negative relation exists in the long term, but not in the short term. The results also show a U-shaped relation between the forward E/P ratio and earnings risk. Compared with high forward E/P firms which are inherently financially distressed, low forward E/P firms exhibit even higher incidence of loss and larger growth volatility in subsequent years. The wide distribution of earnings growth in the lowest forward E/P portfolio indicates that this portfolio includes not only star firms that generate the strongest earnings growth, but also firms that report the most negative earnings growth. This paper shows that the forward E/P ratio is a stronger predictor of future growth than the conventionally used trailing E/P ratio.

Contractual Features of Performance-Vested Executive Equity Compensation

This paper investigates the relations between the key contractual features of performance-vested (p-v) executive equity compensation. We hypothesize that contractual features such as relative performance evaluation (RPE) and long performance horizons can be used to filter noise out of market-based performance metrics. In the empirical analysis, we first report that firms with less volatile returns, better stock performance, and more complex businesses are more likely to use market metrics than accounting metrics. The main analyses show that consistent with our hypotheses, firms using market metrics are more likely to adopt RPE and long performance horizons than firms using accounting metrics. Moreover, we find that RPE, the performance horizon, and the number of metrics are interdependent. These findings reveal intricate relations between the contractual features and have implications for the evolving practice of executive equity compensation.