The return-stages valuation model and the expectations within a firm's P/B and P/E ratios

The return-stages model can quantify the expectations facing a firm from its price-to-book (P/B) and price-to-earnings (PIE) ratios. Me illustrate two implications of the model. First, a firm's PIE and P/E ratios can predict the future cash flow pattern earned by a firm. Second, the operating performance consistent with a given stock return differs across four groups of firms: Growth Firms, Mature Firms, Turnaround Firms, and Declining Firms. Our results imply that a firm's stock return depends, in part, on how its operating Performance compares to the expectations defined by, its P/B and PIE ratios.