The information content of earnings and prices: A simultaneous equations approach

The information content of earnings and prices: A simultaneous equations approach The price-earnings relation can be characterized as a system of simultaneous equations. Earnings and prices can behave as if they are both endogenously determined because they are jointly affected by information that is difficult to specify explicitly. Specification tests provide evidence that both earnings changes and price changes are endogenous. The price and earnings coefficients increase from OLS to joint estimation and, under a restrictive set of assumptions, provide increasingly similar estimates of the permanent component of earnings. The evidence is consistent with the contention that a portion of the single-equation bias can be mitigated via joint estimation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

The information content of earnings and prices: A simultaneous equations approach

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Publisher
Elsevier
Copyright
Copyright © 1997 Elsevier Ltd
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(96)00424-7
Publisher site
See Article on Publisher Site

Abstract

The price-earnings relation can be characterized as a system of simultaneous equations. Earnings and prices can behave as if they are both endogenously determined because they are jointly affected by information that is difficult to specify explicitly. Specification tests provide evidence that both earnings changes and price changes are endogenous. The price and earnings coefficients increase from OLS to joint estimation and, under a restrictive set of assumptions, provide increasingly similar estimates of the permanent component of earnings. The evidence is consistent with the contention that a portion of the single-equation bias can be mitigated via joint estimation.

Journal

Journal of Accounting and EconomicsElsevier

Published: May 1, 1997

References

  • The conservatism principle and the asymmetric timeliness of earnings
    Basu, S.
  • Efficient capital markets: II
    Fama, E.
  • The information content of losses
    Hayn, C.

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