Research on the Relationship between Return on Equity and Earnings Rate of Stock Price

By analyzing the residual earnings model, the paper expounds that high return on equity can lead to the increase of equity, the improvement of return on equity can cause the increase of P/B, and both factors commonly promote the improvement of earnings rate of stock price. Then, the paper proposes that internal rate of return can be applied to calculate multi-period return on equity. Besides, the paper utilizes the positive research methods to analyze the data of return on equity of the SSE 50 Index and the SSE Component Index from 2004 to 2007 and the stock prices on April 30,2004 and April 30,2008 to analyze the relationship between the return on equity and earnings rate of stock price. The research result indicates that high return on equity and the increase of return on equity are remarkably correlated with earnings rate of stock price.