The Incremental Informativeness of Stock Prices for Future Accounting Earnings PDF Download
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Author: Richard M. Morton
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This study extends previous research that documents a stock price reaction leading accounting earnings. The primary issue is that prior studies use a naive earnings expectations model (random walk) as the benchmark for the information content of lagged returns and do not adequately address the incremental information content of lagged returns. This study identifies and estimates firm-specific models of earnings to directly control for the autocorrelation in earnings. The explanatory power of lagged prices with respect to this earnings residual is investigated using both a multiple regression model of lagged returns and also a multiple time-series vector autoregressive model.In-sample estimation of the models provides clear evidence that stock prices impound information about future earnings incremental to the information contained in historical earnings data. Holdout-period analysis of the earnings forecasts from these lagged-return models finds that both models outperform the naive seasonal random walk expectation, but neither model outperforms the more sophisticated Box-Jenkins forecasts. On an individual firm basis, earnings forecasts supplemented with the lagged-return data tend to be less precise than the Box-Jenkins forecasts, but the price-based models demonstrate an ability to rank order the earnings forecast error from the time-series model. The analysis helps to characterize the limitations of lagged returns as a means of predicting future earnings innovations.
Author: Richard M. Morton
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This study extends previous research that documents a stock price reaction leading accounting earnings. The primary issue is that prior studies use a naive earnings expectations model (random walk) as the benchmark for the information content of lagged returns and do not adequately address the incremental information content of lagged returns. This study identifies and estimates firm-specific models of earnings to directly control for the autocorrelation in earnings. The explanatory power of lagged prices with respect to this earnings residual is investigated using both a multiple regression model of lagged returns and also a multiple time-series vector autoregressive model.In-sample estimation of the models provides clear evidence that stock prices impound information about future earnings incremental to the information contained in historical earnings data. Holdout-period analysis of the earnings forecasts from these lagged-return models finds that both models outperform the naive seasonal random walk expectation, but neither model outperforms the more sophisticated Box-Jenkins forecasts. On an individual firm basis, earnings forecasts supplemented with the lagged-return data tend to be less precise than the Box-Jenkins forecasts, but the price-based models demonstrate an ability to rank order the earnings forecast error from the time-series model. The analysis helps to characterize the limitations of lagged returns as a means of predicting future earnings innovations.
Author: Jay Junghun Lee
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
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: Dennis R. Oswald
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
This paper presents both a new approach to studying the consequences of accounting choice and a unique sample to examine the effects of accounting choice in the Ramp;D context. We investigate the effect of firms decision to capitalize Ramp;D expenditures on the amount of information about future earnings reflected in current stock returns, as captured by the association between current-year returns and future earnings (FERC). We use a sample of U.K. firms, which includes both Ramp;D capitalizers and expensers. An important feature of our tests is our use of a two equation system to control for the endogeneity of the accounting choice (i.e., self selection). Proponents of capitalization claim that it enables management to better communicate information about the success of projects and their probable future benefits. Consistent with this, we find that capitalization is associated with higher FERC than expensing.
Author: Uptal Bhattacharya
Publisher:
ISBN: 9789616430258
Category :
Languages : en
Pages : 27
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Book Description
Author: Jay Junghun Lee
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
This study investigates how the value-creation process affects the extent to which stock prices incorporate value-relevant information about future earnings. In contrast to previous studies focusing on the value-reporting process, this paper shows that strong product market power accelerates the incorporation of future earnings into current equity prices due to less uncertainty about future cash flows and that intensive long-term investment deters such incorporation because of greater uncertainty regarding future cash flows. The results suggest that firm fundamentals shaped by product market competition and long-term investment explain the price informativeness about future earnings beyond the impact of management's reporting discretion.
Author: Cheng F. Lee
Publisher: Center for PBBEFR & Ainosco Press
ISBN: 9866286738
Category : Business & Economics
Languages : en
Pages :
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Book Description
Advances in Quantitative Analysis of Finance and Accounting (New Series) is an annual publication designed to disseminate developments in the quantitative analysis of finance and accounting. The publication is a forum for statistical and quantitative analyses of issues in finance and accounting as well as applications of quantitative methods to problems in financial management, financial accounting, and business management. The objective is to promote interaction between academic research in finance and accounting and applied research in the financial community and the accounting profession.
Author: Leonard Zacks
Publisher: John Wiley & Sons
ISBN: 1118127765
Category : Business & Economics
Languages : en
Pages : 352
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Book Description
Investment pioneer Len Zacks presents the latest academic research on how to beat the market using equity anomalies The Handbook of Equity Market Anomalies organizes and summarizes research carried out by hundreds of finance and accounting professors over the last twenty years to identify and measure equity market inefficiencies and provides self-directed individual investors with a framework for incorporating the results of this research into their own investment processes. Edited by Len Zacks, CEO of Zacks Investment Research, and written by leading professors who have performed groundbreaking research on specific anomalies, this book succinctly summarizes the most important anomalies that savvy investors have used for decades to beat the market. Some of the anomalies addressed include the accrual anomaly, net stock anomalies, fundamental anomalies, estimate revisions, changes in and levels of broker recommendations, earnings-per-share surprises, insider trading, price momentum and technical analysis, value and size anomalies, and several seasonal anomalies. This reliable resource also provides insights on how to best use the various anomalies in both market neutral and in long investor portfolios. A treasure trove of investment research and wisdom, the book will save you literally thousands of hours by distilling the essence of twenty years of academic research into eleven clear chapters and providing the framework and conviction to develop market-beating strategies. Strips the academic jargon from the research and highlights the actual returns generated by the anomalies, and documented in the academic literature Provides a theoretical framework within which to understand the concepts of risk adjusted returns and market inefficiencies Anomalies are selected by Len Zacks, a pioneer in the field of investing As the founder of Zacks Investment Research, Len Zacks pioneered the concept of the earnings-per-share surprise in 1982 and developed the Zacks Rank, one of the first anomaly-based stock selection tools. Today, his firm manages U.S. equities for individual and institutional investors and provides investment software and investment data to all types of investors. Now, with his new book, he shows you what it takes to build a quant process to outperform an index based on academically documented market inefficiencies and anomalies.
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:
Publisher:
ISBN:
Category :
Languages : en
Pages : 932
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Book Description
Author: Melumad Nahum
Publisher: Now Publishers Inc
ISBN: 1601982127
Category : Business & Economics
Languages : en
Pages : 159
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Book Description
Line-Item Analysis of Earnings Quality provides a comprehensive summary and analysis of the specific earnings quality issues pertaining to key line item components of the financial statements. After providing an overview of earnings quality and earnings management, Line-Item Analysis of Earnings Quality analyzes key line items from the financial statements. For each key line item, the authors: review accounting principles; discuss implications for earnings quality; evaluate the susceptibility of the item to manipulation; describe analyses and red flags which may inform on the item's quality. Line-Item Analysis of Earnings Quality will prove useful in conducting fundamental and contextual analyses through its analysis and evaluations.
