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Abstract. Several authors recently challenged the linearity of the returns‐earnings relation. In this article, we test the adequacy of alternative nonlinear specifications and examine the validity of various explanations put forth for the returns‐earnings nonlinearity. Our main findings are (1) that the nonlinearity persists even when the returns‐earnings relation is estimated on annual data (most previous studies used quarterly data) and by a nonparametric procedure that does not impose a specific functional form on the relation; (2) that some nonlinearity exists in the relation between stock returns and earnings levels (previous studies have considered earnings surprises), although it is much less pronounced than the returns‐earnings surprise nonlinearity; (3) that the main nonlinear estimation methods used in previous studies and in the current one appear to characterize equally well the underlying returns‐earnings relation; predictions of subsequent stock returns based on each of the three specifications the authors examined are largely indistinguishable with respect to their accuracy; (4) that although “special items,” usually identified as transitory by the accountants, appear to contribute to the nonlinearity, there are probably additional contributing factors; the authors find that when all extraordinary items and “special items” are removed from earnings, the returns‐earnings relation still exhibits nonlinearity, (5) that the inclusion of cash flow or accrual information also does not eliminate the nonlinearity; and (6) that the returns‐cash flow relation is also nonlinear. The authors conclude that nonlinearity of the returns‐earnings relation is quite robust across several alternative specifications. However, the candidate explanations they examined do not fully explain the observed nonlinearity. The search for the underlying cause of nonlinearity must therefore continue. Résumé. Plusieurs auteurs remettaient récemment en question la linéarité de la relation rendements‐bénéfices. Les auteurs de l'article qui suit vérifient, pour leur part, si les formes non linéaires envisageables sont appropriées et examinent la validité de diverses explications mises de l'avant pour éclairer la non‐linéarité de la relation rendements‐bénéfices. Leurs principales observations sont les suivantes: (1) la non‐linéarité persiste même lorsque la relation rendements‐bénéfices est estimée à partir de données annuelles (la plupart des études précédentes s'appuyaient sur des données trimestrielles) et au moyen d'un procédé non paramétrique qui n'impose pas de forme fonctionnelle précise à la relation; (2) une certaine non‐linéarité existe dans la relation entre le rendement des actions et les niveaux de bénéfice (les chercheurs avaient, jusque‐là, pris en considération les bénéfices inattendus), bien que cette non‐linéarité soit beaucoup moins accentuée que la non‐linéarité des rendements‐bénéfices inattendus; (3) les principales méthodes d'estimation non linéaire utilisées dans les études précédentes et dans la présente étude semblent définir tout aussi bien la relation sous‐jacente rendements‐bénéfices; les prédictions relatives aux rendements subséquents des actions en fonction de chacune des trois formes que les auteurs ont examinées sont, dans la majorité des cas, impossibles à différencier en ce qui a trait au degré d'exactitude; (4) bien que des éléments ≪ exceptionnels ≫, habituellement définis comme étant provisoires par les comptables, semblent contribuer à la non‐linéarité, d'autres facteurs y contribuent probablement aussi; selon les auteurs, lorsque tous les éléments extraordinaires et les ≪ éléments exceptionnels ≫ sont exclus des bénéfices, la relation rendements‐bénéfices demeure non linéaire; (5) la relation demeure aussi non linéaire si l'on tient compte de l'information relative aux flux de trésorerie ou aux engagements; et (6) la relation rendements‐flux de trésorerie est également non linéaire. Les auteurs concluent que la non‐linéarité de la relation rendements‐bénéfices, envisagée sous plusieurs formes différentes, résiste assez bien à l'analyse. Toutefois, les causes possibles qu'ils ont choisi d'examiner n'expliquent pas entièrement la non‐linéarité observée, et les recherches doivent se poursuivre.
Contemporary Accounting Research – Wiley
Published: Jun 9, 1994
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