How do accounting variables explain stock price movements? Theory and evidence

How do accounting variables explain stock price movements? Theory and evidence This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang, G. (2000. Accounting information, capital investment decisions, and equity valuation: theory and empirical implications. Journal of Accounting Research 38, 271–295), who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and changes in profitability, growth opportunities, and discount rates. Empirical results confirm the predicted roles of all identified factors. The model explains about 20% of the cross-sectional return variation, with cash-flow-related factors (as opposed to changes in discount rates) accounting for most of the explanatory power. The properties of the model are robust across various subsamples and periods. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

How do accounting variables explain stock price movements? Theory and evidence

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Publisher
Elsevier
Copyright
Copyright © 2007 Elsevier B.V.
ISSN
0165-4101
D.O.I.
10.1016/j.jacceco.2007.01.001
Publisher site
See Article on Publisher Site

Abstract

This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang, G. (2000. Accounting information, capital investment decisions, and equity valuation: theory and empirical implications. Journal of Accounting Research 38, 271–295), who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and changes in profitability, growth opportunities, and discount rates. Empirical results confirm the predicted roles of all identified factors. The model explains about 20% of the cross-sectional return variation, with cash-flow-related factors (as opposed to changes in discount rates) accounting for most of the explanatory power. The properties of the model are robust across various subsamples and periods.

Journal

Journal of Accounting and EconomicsElsevier

Published: Jul 1, 2007

References

  • Investor valuation of the abandonment option
    Berger, P.; Ofek, E.; Swary, I.
  • Relative versus incremental information content
    Biddle, G.; Seow, G.; Siedel, A.
  • The role of expectations in explaining the cross-section of stock returns
    Copeland, T.; Dolgoff, A.; Moel, A.
  • The cross-section of expected stock returns
    Fama, E.; French, K.
  • Capital markets research in accounting
    Kothari, S.P.

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