International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 49 (2010)

© EuroJournals Publishing, Inc. 2010
http://www.eurojournals.com/finance.htm

The Relationship between P/E Ratio, Dividend Yield Ratio

Size and Stock Returns in Jordanian Companies:
A Co-integration Approach

Mona Al-Mwalla
Associate Professor, Department of Banking & Finance
Faculty of Economics & Administrative Sciences
Yarmouk University, Irbid-Jordan
Currently Adjunct Professor at
Prince Sultan University, KSA
E-mail: m_mesmar@yahoo.com

Ahmad M. Al-Omari
Associate Professor, Department of Accounting
Faculty of Economics & Administrative Sciences
Yarmouk University, Irbid-Jordan
E-mail: aalomari@yu.edu.jo

Fayssal Ayad
Graduate Student, Department of Business Administration
Yarmouk University, Irbid-Jordan

Abstract

This paper investigates the static and dynamic relationships between annual stock
returns, dividend yields, PE ratio and total assets. A sample of 24 companies listed in the
Amman Bursa was selected. The annual average values for the suggested variables from
1980 to 2006 was calculated. A dynamic model of stock returns using the Vector Error
Correction Model (VECM) representation of Engle and Granger (1987) was applied with
the insight that even though stock returns, dividend yields, PE ratios and total assets are
non-stationary they may be co-integrated. The results show that there is a long run
equilibrium between dividend yield, P/E ratio, size and the return on the stocks of
Jordanian companies.

Keywords: Co-integration, P/E Ratio, Dividend Yield Ratio, Size, Stock Returns, Amman
Stock Exchange.

1. Introduction
An efficient capital market is a market where security prices adjust rapidly to the arrival of new
information. Some of the most interesting and important academic research over the past 25 years has
analyzed whether the capital markets are efficient. This extensive research is important because its
results have significant real-world implications for investors and portfolio managers. In addition, the
92 International Research Journal of Finance and Economics - Issue 49 (2010)

efficiency of capital markets is one of the most controversial areas in investment research because
opinions regarding the efficiency of capital markets differ widely.
Recently a number of papers questioned the reliability of the efficient market hypothesis by
demonstrating a positive relationship between book-to-market ratio and future stock returns and a
positive relationship between dividend yield ratio and future stock returns. Those studies were mainly
drawn from empirical cross sectional data.
This paper investigates the existence of such relationships using the co-integration
methodology by providing an analysis of the long run equilibrium relationship between these variables
using data available from the Amman Stock Exchange. The paper also explores if a causal relationship
exists between the variables under study.

2. Literature Review
The first significant positive relationship between book-to-market ratio and future stock returns was
advocated by Rosenberg, Ried, and Lanstein (1985). In 1992 Fama and French provided strong
evidence supporting the relationship. Their findings were based on cross-sectional data that included
stocks on the NYSE, AMEX, and NASDAQ. In 1995 Dennis, Perfect, Snow and Wiles verified the
Fama and French study and concluded that the optimal portfolio of stocks should contain the stocks of
small firms’ and have a high book-to-market ratio.
The relationship between dividend yield and future stock return was proclaimed in both a cross-
sectional (Litzenberger and Ramaswamy, 1979) and a time series approach (Rozeff, 1984; Shiller,
1984; Fama and French, 1988, 1989 and Campbell and Shiller,1988). Farzad (2000) denied such
relationships using a co-integration methodology based on a sample of companies listed on the DJIA.
More recently, Kazi (2009) applied a co-integration technique to identify the influential risk factors on
stocks’ return for the Australian stock market.
The aim of this research is to investigate the relationship between dividend yield, PE Ratio, size
and future stock return and to provide an indirect test of market efficiency for an emerging market, the
stock exchange of Jordan. Although researchers have tried to test the market efficiency of the
Jordanian stock market (Al-Mwalla and Al-Khouri, 1996), no research has applied a co-integration
technique. The results of the current research indicate market inefficiency.

3. Hypotheses
The following hypotheses were set in order to achieve the research objectives:
H0 a: There is neither long-run equilibrium nor any co-integration relationship between the
price per share/earnings per share ratio (P/E) and stock return.
H0 b: There is neither long-run equilibrium nor a co-integration relationship between dividend
yield ratio (D/P) and stock returns.
H0 c: There is neither long-run equilibrium nor a co-integration relationship between firm size
(measured by total assets) and stock return.
H0 d: There is no solid causality relationship between the variables under testing.

4. Methodology
The goal of this research is to account for the static and dynamic relationships in annual stock returns
using dividend yield ratio, PE ratio and total assets as a measurement of size. A dynamic model of
stock returns using the Vector Error Correction Model (VECM) representation of Engle and Granger
(1987) is applied with the insight that even though stock returns, dividend yields, PE ratios and total
assets are non-stationary they may be co-integrated. The study indicates that the return generation
process is the error correction process (ECP) of the VECM representation.
International Research Journal of Finance and Economics - Issue 49 (2010) 93

4.1. The Model

The time series proposed in this paper attempts to distinguish between several drivers of returns such
as dividend yields, PE ratios and total assets in the RGP. We assume that changes in current returns
depends on changes in past changes of returns, dividend yields, PE ratios and total assets. Thus we
define a VECM model given as:

Where is an vector of I(1) variables (our suggested endogeneous variables), is an

matrix such that the matrices and have rank , , such that is the
order of the VAR model; are parameter matrices, and is an vector of white noise with a
positive definite covariance matrix.
The researchers determined the previous model by running a series of steps. First the
multivariate data was analysed using a VAR representation. Then a VEC representation was adopted to
extract the contegrating vectors. The contegrating vectors have a lag of 1 by construction. Hence, the
lead 1 contegrating vectors are assumed to enable the extraction of the abnormal shocks in the VAR
model.

4.2. The Dataset

The dataset is the annual average values for the suggested variables from 1980 to 2006 covering a
period of 27 years. Normally, the dataset should be depicted for daily, monthly or quarterly measures
however the availability of the data made it impossible. In fact, making inferences on such a sample
size represents a high risk for spurious results. However this study can be considered a pilot study. The
researchers used average data for 24 Jordanian companies that were listed since the 1980’s in the
Amman Stock Exchange. It is important to note that for the total assets a log transformation was used
prior to time series analyses.

4.3. Empirical Results

4.3.1. Tests of Unit Roots
Table 1 summarises the summary statistics for the dataset used. The average annual return was 8.58%
with a standard deviation of 25.49% similarly the dividend yields exhibited an average of 3.79% with a
considerable volatility of 2.03%. The PE ratios averaged 17.66 with a variability of 19.46 whereas the
average of total assets was 16.13 with a variability of 0.52.
Most of the variables were positively skewed except for the total assets which showed a
negative skewness with moderately high kurtosis. The Jarque-Bera statistic1 significantly showed that
both of the variables annual returns and the total assets were normally distributed. Inversely, it
significantly rejects the normal distribution for the two remaining variables i.e., dividend yield and PE
ratio indicating a non-normality of their unconditional distributions.

Table 1: Summary statistics

ANRET DIVYIELD PERATIO TOTASSETS

Mean 0.085810 3.788112 17.65804 16.12938
Std. Dev. 0.254809 2.031567 19.46440 0.514772
Skewness 0.902496 0.522699 2.510176 -0.565803
Kurtosis 2.793338 5.094554 9.612161 1.884340

1
It is important to note that the required used level of alpha in this article is 5% and this is valid for all the statistical tests
used in the current report.
94 International Research Journal of Finance and Economics - Issue 49 (2010)
Jarque-Bera 3.713294 6.165013 77.54019 2.840884
Probability 0.156195 0.045844 0.000000 0.241607
Sum 2.316880 102.2790 476.7670 435.4932
Sum Sq. Dev. 1.688113 107.3088 9850.439 6.889745
Observations 27 27 27 27

4.3.2. Annual Returns

As showed in Table 2, the non-stationary of the annual returns was rejected using the Augmented
Dickey-Fuller test (ADF test), Phillips-Perron test (PP test) (see Appendix 1) and the Kwiatkowski-
Phillips-Schmidt-Shin test (KPSS test) (see Appendix 2) whereas a more recent test which is the Ng-
Perron test (see Appendix 3) showed inversely that the hypothesis of existing unit roots cannot be
rejected. The researchers adopted the results provided by the Ng-Perron test because of the small
sample size and the theory cannot reject the assumption of existence of unit root for the annual stock
returns.

Table 2: Augmented Dickey-Fuller test statistics for Annual returns

Null Hypothesis: ANRET has a unit root

Exogenous: Constant
Lag Lngth: 0 (Automatic based on SIC, MAXLAG=6)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -3.745442 0.0092
Test critical values: 1% level -3.711457
5% level -2.981038
10% level -2.629906
* MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(ANRET)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
ANRET(-1) -0.742358 0.198203 -3.745442 0.0010
C 0.065416 0.052778 1.239452 0.2272
R-squared 0.368892 Mean dependent var 0.005210
Adjusted R-squared 0.342595 S.D. dependent var 0.316142
S.E. of regression 0.256330 Akaike info criterion 0.189097
Sum squared resid 1.576916 Schwarz criterion 0.285874
Log likelihood -0.458267 F-statistic 14.02834
Durbin-Watson stat 2.020415 Prob(F-statistic) 0.001000

4.3.3. Dividend Yields

It was found for the dividend yield variable that both the ADF (Table 3) and PP tests (Appendix 4)
confirmed the hypothesis of existing unit roots however the KPSS and the Ng-Perron tests showed that
the variable is stationary (Appendices 5 and 6). We adopted in this article the results provided by the
ADF and PP tests.

4.3.4. PE Ratios
As showed in Table 4 and Appendices 7 and 8, the non-stationary of the PE ratios was rejected using
the ADF test, PP test and the KPSS test whereas the Ng-Perron test showed inversely that the
hypothesis of existing unit roots cannot be rejected (Appendix 9). We think that the results provided by
the Ng-Perron test are consistent with the theoretical background relating to this variable.
International Research Journal of Finance and Economics - Issue 49 (2010) 95
Table 3: Augmented Dickey-Fuller test statistics for Dividend yields

Null Hypothesis: DIVYIELD has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=6)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -2.640077 0.0981
Test critical values: 1% level -3.711457
5% level -2.981038
10% level -2.629906
* MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(DIVYIELD)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
DIVYIELD(-1) -0.376866 0.142748 -2.640077 0.0143
C 1.540190 0.619045 2.488011 0.0202
R-squared 0.225057 Mean dependent var 0.092548
Adjusted R-squared 0.192767 S.D. dependent var 1.630568
S.E. of regression 1.465002 Akaike info criterion 3.675394
Sum squared resid 51.50956 Schwarz criterion 3.772171
Log likelihood -45.78012 F-statistic 6.970008
Durbin-Watson stat 1.895989 Prob(F-statistic) 0.014340

Table 4: ADF test for PE ratios

Null Hypothesis: PERATIO has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=6)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.422412 0.0018
Test critical values: 1% level -3.711457
5% level -2.981038
10% level -2.629906
* MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(PERATIO)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
PERATIO(-1) -0.882174 0.199478 -4.422412 0.0002
C 16.23786 5.261208 3.086336 0.0051
R-squared 0.449007 Mean dependent var 0.519920
Adjusted R-squared 0.426049 S.D. dependent var 26.10916
S.E. of regression 19.78018 Akaike info criterion 8.881042
Sum squared resid 9390.135 Schwarz criterion 8.977818
Log likelihood -113.4535 F-statistic 19.55773
Durbin-Watson stat 2.038096 Prob(F-statistic) 0.000180

4.3.5. Total Assets

Concerning the total assets as Table 5 and Appendices (10, 11 and 12) show, all the statistical tests for
existence of unit roots indicated that the non stationary for this variable was rejected.

Table 5: ADF test for Total assets

96 International Research Journal of Finance and Economics - Issue 49 (2010)

Null Hypothesis: TOTASSETS has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=6)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -1.087770 0.9120
Test critical values: 1% level -4.356068
5% level -3.595026
10% level -3.233456
* MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(TOTASSETS)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
TOTASSETS(-1) -0.087730 0.080651 -1.087770 0.2880
C 1.455553 1.229082 1.184260 0.2484
@TREND(1980) 0.001518 0.005386 0.281888 0.7806
R-squared 0.294964 Mean dependent var 0.063023
Adjusted R-squared 0.233656 S.D. dependent var 0.062139
S.E. of regression 0.054397 Akaike info criterion -2.876838
Sum squared resid 0.068058 Schwarz criterion -2.731673
Log likelihood 40.39890 F-statistic 4.811220
Durbin-Watson stat 2.186885 Prob(F-statistic) 0.017965

4.4. The VAR model

In order to attempt to remove serial correlations from the dataset the researchers adopted the VECM
formulation instead of univariate or multiple regressions which may lead to spurious results. First the
researchers undertook a VAR Lag Order selection process. The results for various selection criteria are
listed in Table 6. The LR criterion selected 2 lags whereas the rest of criteria selected lag 4, including
the AIC (Akaike Information Criterion). In this paper the researchers adopt the LR criterion and use 2
lags.
The VAR model estimates are shown in Table 7. Annual returns, dividend yield, PE ratio and
total assets are, moderately to strongly, captured by the model; indicating that lag variables strongly
influence these variables.

Table 6: VAR Lag Order Selection criteria results

VAR Lag Order Selection Criteria

Endogenous variables: ANRET DIVYIELD PERATIO TOTASSETS
Exogenous variables: C
Sample: 1980 2006
Included observations: 23
Lag LogL LR FPE AIC SC HQ
0 -153.3431 NA 10.28538 13.68201 13.87949 13.73168
1 -82.26962 111.2455 0.088011 8.893010 9.880396 9.141335
2 -59.83507 27.31162* 0.058324 8.333484 10.11078 8.780469
3 -37.15901 19.71831 0.049959 7.752958 10.32016 8.398602
4 8.262598 23.69823 0.011316* 5.194557* 8.551670* 6.038861*
* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
International Research Journal of Finance and Economics - Issue 49 (2010) 97
Table 7: Vector Autoregression Estimates

Vector Autoregression Estimates

Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Standard errors in ( ) & t-statistics in [ ]
ANRET DIVYIELD PERATIO TOTASSETS
R-squared 0.396204 0.468025 0.299373 0.992853
Adj. R-squared 0.281195 0.366697 0.165920 0.991492
Sum sq. resids 1.019170 49.15826 6674.624 0.041166
S.E. equation 0.220300 1.529990 17.82805 0.044275
F-statistic 3.444990 4.618888 2.243285 729.3157
Log likelihood 5.216002 -45.17273 -109.0160 46.93483
Akaike AIC -0.016616 3.859441 8.770464 -3.225756
Schwarz SC 0.225326 4.101382 9.012406 -2.983814
Mean dependent 0.086310 3.933808 18.33719 16.16950
S.D. dependent 0.259841 1.922572 19.52090 0.479991
Log likelihood -96.76279
Akaike information criterion 8.981753
Schwarz criterion 9.949520

The VECM Model

A natural progression from a VAR representation is the VECM model, especially when the level series
are non-stationary. The researchers initially test for the rank of the co-integration using the
methodology described by Johansen (1988) under the assumption of linear deterministic trend.

Table 8: Johansen Contegration tests

Sample (adjusted): 1982 2006

Included observations: 25 after adjustments
Trend assumption: Linear deterministic trend
Series: ANRET DIVYIELD PERATIO TOTASSETS
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.746384 71.17682 47.85613 0.0001
At most 1 * 0.463100 36.87847 29.79707 0.0065
At most 2 * 0.451868 21.32991 15.49471 0.0059
At most 3 * 0.222723 6.298948 3.841466 0.0121
Trace test indicates 4 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.746384 34.29835 27.58434 0.0059
At most 1 0.463100 15.54857 21.13162 0.2523
At most 2 * 0.451868 15.03096 14.26460 0.0378
At most 3 * 0.222723 6.298948 3.841466 0.0121
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

From Table 8 the trace test indicates 4 co-integrating equations at 5% level whereas the max-
eigenvalue test indicates just one co-integrating equation. The researchers adopted the max-eigenvalue
criterion in this paper. Table 9 details the adjustment coefficients for this retained equation.
98 International Research Journal of Finance and Economics - Issue 49 (2010)
Table 9: Co-integration equation details

Unrestricted Co-integrating Coefficients (normalized by b'*S11*b=I):

ANRET DIVYIELD PERATIO TOTASSETS
-1.782366 0.175326 -0.080089 0.982025
-3.497795 0.650815 0.020520 -1.422497
5.327409 0.045765 -0.035835 -1.140785
0.902185 0.152837 0.006952 2.117948
Unrestricted Adjustment Coefficients (alpha):
D(ANRET) 0.175528 0.090909 -0.011255 -0.040003
D(DIVYIELD) -0.261027 -0.664700 -0.341882 -0.491291
D(PERATIO) 9.512104 -5.001997 10.72600 2.155955
D(TOTASSETS) -0.034767 0.007580 0.007607 -0.008237
1 Co-integrating Equation(s): Log likelihood -94.45392
Normalized co-integrating coefficients (standard error in parentheses)
ANRET DIVYIELD PERATIO TOTASSETS
1.000000 -0.098367 0.044934 -0.550967
(0.04567) (0.00666) (0.22201)
Adjustment coefficients (standard error in parentheses)
-0.312855
D(ANRET)
(0.07735)
0.465245
D(DIVYIELD)
(0.62277)
-16.95405
D(PERATIO)
(7.76103)
D(TOTASSETS) 0.061967
(0.01272)
Table 10 displays the different VECM estimates for a lag of 1 with one co-integration equation.
The values of R-square statistic range from 13% to 70%, indicating a possible good specification that
explains the annual stock returns. The dynamic relationships are displayed in Table 11. The residuals
from the VECM model also exhibit slight differences from each other. However, one can generalize
that the variables are related with each others. Thus the result of the VECM model indicates that the
model captures the changes in the current and the past changes in the variables.

Table 10: Vector Error Correction Estimates

Sample (adjusted): 1982 2006

Included observations: 25 after adjustments
Standard errors in ( ) & t-statistics in [ ]
Cointegrating Eq: CointEq1
ANRET(-1) 1.000000
-0.098367
DIVYIELD(-1) (0.04567)
[-2.15378]
0.044934
PERATIO(-1) (0.00666)
[ 6.74731]
-0.550967
TOTASSETS(-1) (0.22201)
[-2.48177]
C 8.375527
Error Correction: D(ANRET) D(DIVYIELD) D(PERATIO) D(TOTASSETS)
-0.312855 0.465245 -16.95405 0.061967
CointEq1 (0.07735) (0.62277) (7.76103) (0.01272)
[-4.04484] [ 0.74706] [-2.18451] [ 4.87213]
D(ANRET(-1)) -0.660118 1.968284 24.12550 0.150555
(0.17828) (1.43545) (17.8888) (0.02932)
International Research Journal of Finance and Economics - Issue 49 (2010) 99
[-3.70269] [ 1.37119] [ 1.34864] [ 5.13558]
0.002929 0.056977 -3.722007 0.008370
D(DIVYIELD(-1)) (0.03202) (0.25781) (3.21286) (0.00527)
[ 0.09147] [ 0.22101] [-1.15847] [ 1.58977]
0.005407 -0.002917 -0.025783 -0.001207
D(PERATIO(-1)) (0.00254) (0.02045) (0.25491) (0.00042)
[ 2.12823] [-0.14260] [-0.10115] [-2.88824]
-1.220597 7.987830 123.4432 0.343456
D(TOTASSETS(-1)) (0.86985) (7.00375) (87.2819) (0.14304)
[-1.40322] [ 1.14051] [ 1.41431] [ 2.40116]
0.076095 -0.412848 -7.029627 0.037280
C (0.07150) (0.57573) (7.17478) (0.01176)
[ 1.06421] [-0.71709] [-0.97977] [ 3.17059]
R-squared 0.641232 0.127447 0.471531 0.695404
Adj. R-squared 0.546820 -0.102173 0.332460 0.615247
S.E. equation 0.216977 1.747025 21.77170 0.035679
Mean dependent 0.008085 0.096250 0.540716 0.057890
S.D. dependent 0.322314 1.664080 26.64733 0.057521

Table 11: VAR Model - Substituted Coefficients:

The Impulse response functions to Cholesky one standard deviation innovation plots are
depicted. The annual stock returns are influenced by all the other lag 1 variables, thus explaining the
strong fit of the VECM model.
In order to validate the VECM representation several follow up tests were used. Portmanteau
tests for autocorrelations in Table 12 show that the hypothesis of no autocorrelations between the
residuals for different lags cannot be rejected. Similarly, the existence of serial correlations between
the residuals is rejected (Table 13). The residuals are accepted to be multivariate normally distributed
(Table 14). The tests of Heteroskedasticity of the residuals with both cross and without cross terms
indicate the rejection of the Heteroskedasticity case (Tables 15 and 16). Therefore, the VECM
specification is accepted and considered to be consistently fitting the data.
100 International Research Journal of Finance and Economics - Issue 49 (2010)
Table 12: VEC Residual Portmanteau Tests for Autocorrelations

H0: no residual autocorrelations up to lag h

Included observations: 25
Lags Q-Stat Prob. Adj Q-Stat Prob. Df
1 8.250476 NA* 8.594246 NA* NA*
2 15.27432 0.5046 16.22886 0.4371 16
3 36.24679 0.2771 40.06121 0.1549 32
4 48.14321 0.4670 54.22361 0.2492 48
5 60.27086 0.6091 69.38317 0.3010 64
6 64.75816 0.8921 75.28752 0.6282 80
7 72.88649 0.9621 86.57687 0.7438 96
8 86.49763 0.9647 106.5933 0.6265 112
9 98.83567 0.9738 125.8714 0.5367 128
10 106.0117 0.9925 137.8315 0.6291 144
11 116.7998 0.9958 157.0959 0.5501 160
12 123.6179 0.9990 170.2077 0.6089 176
* The test is valid only for lags larger than the VAR lag order.
df is degrees of freedom for (approximate) chi-square distribution

Table 13: VEC Residual Serial Correlation LM Tests

H0: no serial correlation at lag order h

Sample: 1980 2006
Included observations: 25
Lags LM-Stat Prob
1 22.49011 0.1281
2 20.01815 0.2194
3 20.62528 0.1934
4 14.06117 0.5942
5 14.97806 0.5262
6 4.620003 0.9973
7 11.99115 0.7446
8 19.71595 0.2333
9 19.05915 0.2656
10 18.57194 0.2915
11 16.46792 0.4208
12 8.654884 0.9269
Probs from chi-square with 16 df.

Table 14: VEC Residual Normality Tests

Orthogonalization: Cholesky (Lutkepohl)

H0: residuals are multivariate normal
Sample: 1980 2006
Included observations: 25
Component Skewness Chi-sq df Prob.
1 0.464546 0.899179 1 0.3430
2 0.143715 0.086058 1 0.7692
3 0.832656 2.888819 1 0.0892
4 0.047992 0.009597 1 0.9220
Joint 3.883653 4 0.4220
Component Kurtosis Chi-sq df Prob.
1 1.981028 1.081566 1 0.2983
2 1.579953 2.100555 1 0.1472
3 2.181505 0.697848 1 0.4035
4 1.238334 3.232779 1 0.0722
Joint 7.112748 4 0.1300
Component Jarque-Bera df Prob.
International Research Journal of Finance and Economics - Issue 49 (2010) 101
1 1.980744 2 0.3714
2 2.186613 2 0.3351
3 3.586667 2 0.1664
4 3.242376 2 0.1977
Joint 10.99640 8 0.2019

Table 15: VEC Residual Heteroskedasticity Tests: No Cross Terms (only levels and squares)

Sample: 1980 2006

Included observations: 25
Joint test:
Chi-sq df Prob.
106.1765 100 0.3174
Individual components:
Dependent R-squared F(10,14) Prob. Chi-sq(10) Prob.
res1*res1 0.179488 0.306253 0.9670 4.487212 0.9227
res2*res2 0.601344 2.111800 0.0977 15.03360 0.1308
res3*res3 0.449544 1.143347 0.3983 11.23860 0.3392
res4*res4 0.239903 0.441869 0.9009 5.997566 0.8155
res2*res1 0.729827 3.781867 0.0119 18.24568 0.0510
res3*res1 0.572185 1.872442 0.1375 14.30462 0.1595
res3*res2 0.244680 0.453519 0.8937 6.117002 0.8053
res4*res1 0.122546 0.195526 0.9933 3.063660 0.9799
res4*res2 0.313440 0.639152 0.7592 7.835999 0.6449
res4*res3 0.501726 1.409702 0.2705 12.54316 0.2503

Table 16: VEC Residual Heteroskedasticity Tests: Includes Cross Terms

Sample: 1980 2006

Included observations: 25
Joint test:
Chi-sq df Prob.
202.3212 200 0.4408
Individual components:
Dependent R-squared F(20,4) Prob. Chi-sq(20) Prob.
res1*res1 0.290152 0.081751 1.0000 7.253811 0.9958
res2*res2 0.780031 0.709219 0.7332 19.50078 0.4895
res3*res3 0.992945 28.14810 0.0026 24.82362 0.2083
res4*res4 0.591769 0.289919 0.9732 14.79423 0.7881
res2*res1 0.944419 3.398375 0.1218 23.61048 0.2598
res3*res1 0.983224 11.72191 0.0140 24.58060 0.2179
res3*res2 0.803456 0.817582 0.6676 20.08639 0.4525
res4*res1 0.320482 0.094326 0.9999 8.012059 0.9918
res4*res2 0.861339 1.242371 0.4636 21.53348 0.3664
res4*res3 0.930757 2.688363 0.1742 23.26892 0.2758

5. Conclusion
The Analysis of this research indicates the existence of long run equilibrium between dividend yield,
P/E ratio, size and Stocks’ return for the sample under study. The results reject the stated hypotheses.
The finding of this study might indicate that, the Jordanian stock market suffer from informational
inefficiencies and investors can apply an investment criteria that utilizes P/E and Size anomalies to
earn abnormal returns.
102 International Research Journal of Finance and Economics - Issue 49 (2010)

References
[1] Al-Mwalla, M. and Al-Kouri R. S. (1996), Evidence on the Nature of Size and P/E Anomalies
in Stock Prices: Evidence from Amman Financial Market, Mu’tah Lil-Buhooth Wa Al-Dirasat,
“Humanities and Social Sciences Series”, 11 (4): 5-23.
[2] Banz, R. W. (1981), The Relationship between Return and Market Value of Common Stocks,
Journal of Financial Economics, 9, 3-18.
[3] Campbell, J. & Shiller, R. (1988), The Dividend Price Ratio and Expectations of Future
Dividends and Discount Factors, Review of Financial Studies, 1, 195-228.
[4] Companies Guide- Amman Stock Exchange.
[5] Dennis, P., Perfect, S., Snow, K., & Wiles, K. (1995), The Effects of Rebalancing on Size and
Book-to-Market Ratio Portfolio Returns, Financial Analyst Journal, 51, 47-57.
[6] Engle, R F, and C W J Granger, (1987), Co-integration and Error Correction: Representation,
Estimation and Testing, Econometrica, 55, 251-276.
[7] Farzad, F. (2000), An Empirical Investigation of the Effects of Book-to-Market Ratio and
Dividend Yield on Stock Returns, The American Society of Business and behavioral Sciences,
7, 4-11.
[8] Fama, E. F. & French, K. R. (1988), Dividend Yields and Expected Stock Returns, Journal of
Financial Economics, 22, 3-25.
[9] Fama, E. F. & French, K. R. (1989), Business Conditions and Expected Returns on Stocks and
Bonds, Journal of Financial Economics, 25, 23-49.
[10] Fama, E. F. & French, K. R. (1992), The Cross-Section of Expected Stock Returns, Journal of
Finance, 47, 427-465.
[11] Fama, E. F. & French, K. R. (1993), Common Risk Factors in the Returns on Stocks and
Bonds, Journal of Financial Economics, 33, 3-56.
[12] Fama, E. F. & French, K. R. (1998), Value Versus Growth: The International Evidence, Journal
of Finance, 53.
[13] Johansen, S, (1988), Statistical Analysis of Cointegration Vectors, Journal of Economic
Dynamics and Control, 12, 231-254.
[14] Kazi, M., (2009), An Application of Co-Integration Technique for Detecting Influential Risk
Factors of the Australian Stock Market, International Research Journal of Finance and
Economics, Issue 25, 78-89.
[15] Litzenberger , R. H . & Ramaswamy , K .(1979), The Effects of Personal Taxes and Dividends
on Capital Asset Prices: Theory and Empirical Evidence, Journal of Financial Economics, 7,
163--196.
[16] Rielly, F. K., & Brown, K. C. (1999), Investment Analysis and Portfolio Management, New
York, The Dryden Press.
[17] Rosenberg, B., Reid, K., & Lanstein, R. (1985), Persuasive Evidence of Market Inefficiency,
Journal of portfolio Management, 11, 9-17.
[18] Rozeff, M. (1984), Dividend Yields And Equity Risk Premiums, Journal of Portfolio
Management, 11, 68-75.
[19] Shiller, R. J. (1984), Stock Prices and Social Dynamics, Brooking Papers on Economic
Activity, 2, 457-498.
International Research Journal of Finance and Economics - Issue 49 (2010) 103

Appendix
Appendix 1: Phillips-Perron test statistics for Annual returns

Null Hypothesis: ANRET has a unit root

Exogenous: Constant
Bandwidth: 1 (Newey-West using Bartlett kernel)
Adj. t-Stat Prob.*
Phillips-Perron test statistic -3.730772 0.0096
Test critical values: 1% level -3.711457
5% level -2.981038
10% level -2.629906
*MacKinnon (1996) one-sided p-values.
Residual variance (no correction) 0.060651
HAC corrected variance (Bartlett kernel) 0.059164
Phillips-Perron Test Equation
Dependent Variable: D(ANRET)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
ANRET(-1) -0.742358 0.198203 -3.745442 0.0010
C 0.065416 0.052778 1.239452 0.2272
R-squared 0.368892 Mean dependent var 0.005210
Adjusted R-squared 0.342595 S.D. dependent var 0.316142
S.E. of regression 0.256330 Akaike info criterion 0.189097
Sum squared resid 1.576916 Schwarz criterion 0.285874
Log likelihood -0.458267 F-statistic 14.02834
Durbin-Watson stat 2.020415 Prob(F-statistic) 0.001000

Appendix 2: Kwiatkowski-Phillips-Schmidt-Shin test statistics for Annual returns

Null Hypothesis: ANRET is stationary

Exogenous: Constant
Bandwidth: 2 (Newey-West using Bartlett kernel)
LM-Stat.
Kwiatkowski-Phillips-Schmidt-Shin test statistic 0.078906
Asymptotic critical values*: 1% level 0.739000
5% level 0.463000
10% level 0.347000
zKwiatkowski-Phillips-Schmidt-Shin (1992, Table 1)
Residual variance (no correction) 0.062523
HAC corrected variance (Bartlett kernel) 0.090374
KPSS Test Equation
Dependent Variable: ANRET
Method: Least Squares
Sample: 1980 2006
Included observations: 27
Variable Coefficient Std. Error t-Statistic Prob.
C 0.085810 0.049038 1.749877 0.0919
R-squared 0.000000 Mean dependent var 0.085810
Adjusted R-squared 0.000000 S.D. dependent var 0.254809
S.E. of regression 0.254809 Akaike info criterion 0.139726
Sum squared resid 1.688113 Schwarz criterion 0.187720
Log likelihood -0.886298 Durbin-Watson stat 1.480559
104 International Research Journal of Finance and Economics - Issue 49 (2010)
Appendix 3: Ng-Perron test statistics for Annual returns

Null Hypothesis: ANRET has a unit root

Exogenous: Constant
Lag length: 0 (Spectral GLS-detrended AR based on SIC, MAXLAG=6)
Sample: 1980 2006
Included observations: 27
MZa MZt MSB MPT
Ng-Perron test statistics -12.1325 -2.45219 0.20212 2.06064
Asymptotic critical values*: 1% -13.8000 -2.58000 0.17400 1.78000
5% -8.10000 -1.98000 0.23300 3.17000
10% -5.70000 -1.62000 0.27500 4.45000
*Ng-Perron (2001, Table 1)
HAC corrected variance (Spectral GLS-detrended AR) 0.060655

Appendix 4: Phillips-Perron test statistics for Dividend yields

Null Hypothesis: DIVYIELD has a unit root

Exogenous: Constant
Bandwidth: 2 (Newey-West using Bartlett kernel)
Adj. t-Stat Prob.*
Phillips-Perron test statistic -2.614993 0.1028
Test critical values: 1% level -3.711457
5% level -2.981038
10% level -2.629906
*MacKinnon (1996) one-sided p-values.
Residual variance (no correction) 1.981137
HAC corrected variance (Bartlett kernel) 1.872390
Phillips-Perron Test Equation
Dependent Variable: D(DIVYIELD)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
DIVYIELD(-1) -0.376866 0.142748 -2.640077 0.0143
C 1.540190 0.619045 2.488011 0.0202
R-squared 0.225057 Mean dependent var 0.092548
Adjusted R-squared 0.192767 S.D. dependent var 1.630568
S.E. of regression 1.465002 Akaike info criterion 3.675394
Sum squared resid 51.50956 Schwarz criterion 3.772171
Log likelihood -45.78012 F-statistic 6.970008
Durbin-Watson stat 1.895989 Prob(F-statistic) 0.014340
International Research Journal of Finance and Economics - Issue 49 (2010) 105
Appendix 5: KPSS test statistics for Dividend yields

Null Hypothesis: DIVYIELD is stationary

Exogenous: Constant, Linear Trend
Bandwidth: 3 (Newey-West using Bartlett kernel)
Kwiatkowski-Phillips-Schmidt-Shin test statistic LM-Stat.
0.142877
Asymptotic critical values*: 1% level 0.216000
5% level 0.146000
10% level 0.119000
*Kwiatkowski-Phillips-Schmidt-Shin (1992, Table 1)
Residual variance (no correction) 3.919044
HAC corrected variance (Bartlett kernel) 8.624602
KPSS Test Equation
Dependent Variable: DIVYIELD
Method: Least Squares
Sample: 1980 2006
Included observations: 27
Variable Coefficient Std. Error t-Statistic Prob.
C 3.395417 0.770360 4.407569 0.0002
@TREND(1980) 0.030207 0.050833 0.594247 0.5577
R-squared 0.013928 Mean dependent var 3.788112
Adjusted R-squared -0.025514 S.D. dependent var 2.031567
S.E. of regression 2.057320 Akaike info criterion 4.351873
Sum squared resid 105.8142 Schwarz criterion 4.447861
Log likelihood -56.75028 F-statistic 0.353129
Durbin-Watson stat 0.629120 Prob(F-statistic) 0.557687

Appendix 6: Ng-Perron test statistics for Dividend yields

Null Hypothesis: DIVYIELD has a unit root

Exogenous: Constant
Lag length: 0 (Spectral GLS-detrended AR based on SIC, MAXLAG=6)
Sample: 1980 2006
Included observations: 27
MZa MZt MSB MPT
Ng-Perron test statistics -5.25394 -1.61980 0.30830 4.66571
Asymptotic critical values*: 1% -13.8000 -2.58000 0.17400 1.78000
5% -8.10000 -1.98000 0.23300 3.17000
10% -5.70000 -1.62000 0.27500 4.45000
*Ng-Perron (2001, Table 1)
HAC corrected variance (Spectral GLS-detrended AR) 2.194065

Appendix 7: PP test for PE ratios

Null Hypothesis: PERATIO has a unit root

Exogenous: Constant
Bandwidth: 0 (Newey-West using Bartlett kernel)
Adj. t-Stat Prob.*
Phillips-Perron test statistic -4.422412 0.0018
Test critical values: 1% level -3.711457
5% level -2.981038
10% level -2.629906
*MacKinnon (1996) one-sided p-values.
Residual variance (no correction) 361.1590
HAC corrected variance (Bartlett kernel) 361.1590
Phillips-Perron Test Equation
Dependent Variable: D(PERATIO)
106 International Research Journal of Finance and Economics - Issue 49 (2010)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
PERATIO(-1) -0.882174 0.199478 -4.422412 0.0002
C 16.23786 5.261208 3.086336 0.0051
R-squared 0.449007 Mean dependent var 0.519920
Adjusted R-squared 0.426049 S.D. dependent var 26.10916
S.E. of regression 19.78018 Akaike info criterion 8.881042
Sum squared resid 9390.135 Schwarz criterion 8.977818
Log likelihood -113.4535 F-statistic 19.55773
Durbin-Watson stat 2.038096 Prob(F-statistic) 0.000180

Appendix 8: KPSS test for PE ratios

Null Hypothesis: PERATIO is stationary

Exogenous: Constant
Bandwidth: 1 (Newey-West using Bartlett kernel)
LM-Stat.
Kwiatkowski-Phillips-Schmidt-Shin test statistic 0.255433
Asymptotic critical values*: 1% level 0.739000
5% level 0.463000
10% level 0.347000
*Kwiatkowski-Phillips-Schmidt-Shin (1992, Table 1)
Residual variance (no correction) 364.8311
HAC corrected variance (Bartlett kernel) 407.8440
KPSS Test Equation
Dependent Variable: PERATIO
Method: Least Squares
Sample: 1980 2006
Included observations: 27
Variable Coefficient Std. Error t-Statistic Prob.
C 17.65804 3.745926 4.713930 0.0001
R-squared 0.000000 Mean dependent var 17.65804
Adjusted R-squared 0.000000 S.D. dependent var 19.46440
S.E. of regression 19.46440 Akaike info criterion 8.811386
Sum squared resid 9850.439 Schwarz criterion 8.859380
Log likelihood -117.9537 Durbin-Watson stat 1.730809

Appendix 9: Ng-Perron test for PE ratios

Null Hypothesis: PERATIO has a unit root

Exogenous: Constant
Lag length: 0 (Spectral GLS-detrended AR based on SIC, MAXLAG=6)
Sample: 1980 2006
Included observations: 27
MZa MZt MSB MPT
Ng-Perron test statistics -12.3658 -2.48644 0.20107 1.98166
Asymptotic critical values*: 1% -13.8000 -2.58000 0.17400 1.78000
5% -8.10000 -1.98000 0.23300 3.17000
10% -5.70000 -1.62000 0.27500 4.45000
*Ng-Perron (2001, Table 1)
HAC corrected variance (Spectral GLS-detrended AR) 385.5734
International Research Journal of Finance and Economics - Issue 49 (2010) 107
Appendix 10: PP test for Total assets

Null Hypothesis: PERATIO has a unit root

Exogenous: Constant
Bandwidth: 0 (Newey-West using Bartlett kernel)
Adj. t-Stat Prob.*
Phillips-Perron test statistic -1.069466 0.9152
Test critical values: 1% level -4.356068
5% level -3.595026
10% level -3.233456
*MacKinnon (1996) one-sided p-values.
Residual variance (no correction) 0.002618
HAC corrected variance (Bartlett kernel) 0.002510
Phillips-Perron Test Equation
Dependent Variable: D(PERATIO)
Method: Least Squares
Sample (adjusted): 1981 2006
Included observations: 26 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
TOTASSETS(-1) -0.087730 0.080651 -1.087770 0.2880
C 1.455553 1.229082 1.184260 0.2484
@TREND(1980) 0.001518 0.005386 0.281888 0.7806
R-squared 0.294964 Mean dependent var 0.063023
Adjusted R-squared 0.233656 S.D. dependent var 0.062139
S.E. of regression 0.054397 Akaike info criterion -2.876838
Sum squared resid 0.068058 Schwarz criterion -2.731673
Log likelihood 40.39890 F-statistic 4.811220
Durbin-Watson stat 2.186885 Prob(F-statistic) 0.017965

Appendix 11: KPSS test for Total assets

Null Hypothesis: TOTASSETS is stationary

Exogenous: Constant
Bandwidth: 3 (Newey-West using Bartlett kernel)
Kwiatkowski-Phillips-Schmidt-Shin test statistic LM-Stat.
0.749055
Asymptotic critical values* 1% level 0.739000
5% level 0.463000
10% level 0.347000
*Kwiatkowski-Phillips-Schmidt-Shin (1992, Table 1)
Residual variance (no correction) 0.255176
HAC corrected variance (Bartlett kernel) 0.875659
KPSS Test Equation
Dependent Variable: TOTASSETS
Method: Least Squares
Sample: 1980 2006
Included observations: 27
Variable Coefficient Std. Error t-Statistic Prob.
C 16.12938 0.099068 162.8113 0.0000
R-squared -0.000000 Mean dependent var 16.12938
Adjusted R-squared -0.000000 S.D. dependent var 0.514772
S.E. of regression 0.514772 Akaike info criterion 1.546148
Sum squared resid 6.889745 Schwarz criterion 1.594142
Log likelihood -19.87300 Durbin-Watson stat 0.029000
108 International Research Journal of Finance and Economics - Issue 49 (2010)
Appendix 12: Ng-Perron test for Total assets

Null Hypothesis: PERATIO has a unit root

Exogenous: Constant
Lag length: 0 (Spectral GLS-detrended AR based on SIC, MAXLAG=6)
Sample: 1980 2006
Included observations: 27
MZa MZt MSB MPT
Ng-Perron test statistics -0.55237 -0.29753 0.53865 18.7973
Asymptotic critical values*: 1% -13.8000 -2.58000 0.17400 1.78000
5% -8.10000 -1.98000 0.23300 3.17000
10% -5.70000 -1.62000 0.27500 4.45000
*Ng-Perron (2001, Table 1)
HAC corrected variance (Spectral GLS-detrended AR) 0.039474