An Empirical Study of the Relationship between Free Float Ratio and P/E Ratio in Chinese Stock Market

P/E ratio is an important index for each stock in different stock markets, but few empirical researches of P/E ratio in Chinese stock market have been published till now. By the latest nonparametric model specification method, this paper finds a linear relationship between P/E ratio and the reciprocal of free float ratio (RFFR) of individual stocks in China's Shanghai and Shenzhen stock exchanges on the cross-section data of listed companies. This kind of linear relationship represents a typical characteristic of Chinese stock market and furthermore, the linear coefficient of RFFR in the semi-parameter model provides a more convincible estimation to compute the liquidity premium of individual stocks than the coefficient in a line model when controlling the influences of assets and liabilities