Predictability and the earnings–returns relation

Predictability and the earnings–returns relation This paper studies the effects of predictability on the earnings–returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings–returns relation is negative at the aggregate level but positive at the firm level. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Predictability and the earnings–returns relation

Journal of Financial Economics, Volume 94 (1) – Oct 1, 2009

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Publisher
Elsevier
Copyright
Copyright © 2009 Elsevier B.V.
ISSN
0304-405x
DOI
10.1016/j.jfineco.2008.10.005
Publisher site
See Article on Publisher Site

Abstract

This paper studies the effects of predictability on the earnings–returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings–returns relation is negative at the aggregate level but positive at the firm level.

Journal

Journal of Financial EconomicsElsevier

Published: Oct 1, 2009

References

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