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Author: Norman C. Strong
Publisher:
ISBN:
Category :
Languages : en
Pages :
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We extend the Kothari-Zimmerman (1993) study of price- earnings models to a more general accounting based valuation model. In this more general setting earnings response coefficients are not usually equal to the reciprocal of the firm's cost of equity capital. Moreover the price-earnings models considered by Kothari and Zimmerman (1993) can lead to upward biased estimates of the true earnings response coefficient. Using data for UK companies we first replicate the findings of Kothari and Zimmerman and then present new evidence that rejects the simple price earnings model in favour of the general model.
Author: Norman C. Strong
Publisher:
ISBN:
Category :
Languages : en
Pages :
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We extend the Kothari-Zimmerman (1993) study of price- earnings models to a more general accounting based valuation model. In this more general setting earnings response coefficients are not usually equal to the reciprocal of the firm's cost of equity capital. Moreover the price-earnings models considered by Kothari and Zimmerman (1993) can lead to upward biased estimates of the true earnings response coefficient. Using data for UK companies we first replicate the findings of Kothari and Zimmerman and then present new evidence that rejects the simple price earnings model in favour of the general model.
Author: Nandkumar Nayar
Publisher:
ISBN:
Category :
Languages : en
Pages : 23
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We provide a rigorous and comprehensive set of derivations of earnings response coefficient models in levels and changes forms. Reverse return coefficient models are also derived. The models all are variants on the present value of dividends model of stock prices. Most of these models do not appear in the literature or appear only implicitly. We start with the simplest 100 percent payout model and work up to IMA (1,1) processes for earnings. We also model the case in which the information set is more than earnings. The approach introduced in this article provides a firm basis for further extensions.
Author: Norman Strong
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Author: Krishnamoorthy Ramesh
Publisher:
ISBN:
Category : Corporate profits
Languages : en
Pages : 262
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Author: Jay Junghun Lee
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Prior literature suggests that stock prices lead earnings in reflecting value-relevant information because accounting income incorporates information discretely to satisfy recognition principles while stock prices incorporate it continuously. Using the future earnings response coefficient (FERC) methodology, this study derives a model that relates the recognition lag of earnings to the incremental informativeness of future anticipated earnings in equity prices after controlling for current realized earnings. The analytical FERC model shows that the pricing coefficient on future earnings is positive in the presence of stock prices leading earnings. More importantly, the pricing coefficient on future earnings increases with the recognition lag but the pricing coefficient on current earnings decreases with the lag. The results suggest that recognition principles that intend to enhance the reliability of earnings inadvertently lower the timeliness of earnings and thus shift the investors' demand for value-relevant information from current realized earnings to future anticipated earnings. In addition, this study confirms the FERC model as an empirical model that investigates the extent to which stock prices lead earnings.
Author: C. S. Agnes Cheng
Publisher:
ISBN:
Category :
Languages : en
Pages : 54
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Author:
Publisher: GRIN Verlag
ISBN: 3668963924
Category : Business & Economics
Languages : en
Pages : 16
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Seminar paper from the year 2018 in the subject Business economics - Investment and Finance, grade: 2,7, University of Cologne, course: Bachelorseminar Corporate Finance, language: English, abstract: This paper seeks to examine different models to forecast revenue of companies. This is being achieved by examining costs of capital, which are a good representative therefor. The models examined in this paper can be divided into two sections. First, there are mechanical models, second there is one characteristic-based model. The models stand in contrast to analysts’ forecasts. This paper sums up different authors who illustrate, that mechanical models outperform analysts’ forecasts in terms of revenue forecasting. First, the HVZ mode is introduced which is due to outperform analysts’ forecasts. Second, the EP and RI model are introduced, next to a random walk model (RW model) as a benchmark. Objective of this paper is to find out which advantages go along with mechanical models, and whether the quality of forecast could be influenced positively. The topic of revenue forecast is highly relevant for different stakeholders in the financial industry. Based on revenue forecasts investment decisions are met by investors. One advantage of mechanical models therefore, is the greater feasibility due to the greater coverage. Mechanical models rely on firm fundamentals and are hence available for much more companies. Analysts’ forecasts are only available for firms of a certain size upwards. Costs of capital are a topic of focus not only for investment decisions but also for internal application. Apart from the use as a financial ratio it is negatively associated with customer satisfaction. The paper finds out, that the HVZ model outperforms analysts’ forecasts in terms of forecast bias and earnings response coefficient. However, the HVZ model does not outperform analysts’ forecasts in terms of accuracy. The EP and RI model both outperform the HVZ model in terms of all three criteria: forecast bias, earnings response coefficient and accuracy. The characteristic-based model sets up a linear function solely by firm fundamentals, that avoids including unobservable future covariances. Besides, it concludes certain key findings about abnormal earnings volatility and economy-wide risk.
Author: Ray Donnelly
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Estimates of the earnings response coefficient (ERC) can be improved by including leading returns in return-earnings models [Kothari and Sloan (1992), Donnelly and Walker (1995)]. This improvement in estimated ERC can be used to measure price anticipation of earnings. The research reported here exploits this fact to identify firm specific factors that are related to the ability of prices to lead earnings in the UK. Price anticipation of earnings occurs because accounting recognition lags value-relevant events while the market responds to news of these events in a timely fashion. Thus, a major determinant of price anticipation of earnings is the information environment of the firm. Theories and prior empirical research pertaining to the information environment [e.g. Bhushan (1989a, 1989b), Frankel McNichols and Wilson (1994)] are used to identify three variables, thin trading, capital issues and volatility of returns, which determine the extent of price anticipation of earnings. Since prior research [Donnelly and Walker (1995)] has demonstrated that price anticipation of earnings in the UK is related to both size and persistence, these variables are also examined and controlled for here. The empirical tests suggest that price anticipation of earnings is negatively related thin trading and risk. It is positively related to size, earnings persistence, the propensity for external financing and return volatility in the year immediately prior to that to which the anticipated earnings pertain.
Author: Jennifer Francis
Publisher: Now Publishers Inc
ISBN: 1601981147
Category : Business & Economics
Languages : en
Pages : 97
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Book Description
This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Author: S. P. Kothari
Publisher:
ISBN:
Category : Income accounting
Languages : en
Pages : 48
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