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2 edition of The relation between stock returns and earnings found in the catalog.

The relation between stock returns and earnings

a study of newly-public firms

by Gita R. Rao

  • 238 Want to read
  • 34 Currently reading

Published by University of Illinois at Urbana-Champaign in Champaign .
Written in English

    Subjects:
  • Economics

  • Edition Notes

    Includes bibliographical references (p. 31-32).

    StatementGita R. Rao
    SeriesBEBR faculty working paper -- no.91-0126, BEBR faculty working paper -- no.91-0126.
    ContributionsUniversity of Illinois at Urbana-Champaign. Bureau of Economic and Business Research
    The Physical Object
    Pagination32, [17] p. ;
    Number of Pages32
    ID Numbers
    Open LibraryOL25168343M
    OCLC/WorldCa535283471

    We adopt a heterogeneous regime switching method to examine the informativeness of accounting earnings for stock returns. We identify two distinct time-series regimes in terms of the relation between earnings and returns. In the low volatility regime (typical of bull markets), earnings are moderately informative for stock returns. But in high volatility market conditions . expected earnings relative to book equity, firms with higher expected growth in book equity due to reinvestment of earnings have lower expected stock returns. We test for the book-to-market, profitability, and investment effects in expected returns predicted by the valuation equation (3). This is not virgin territory. Though our methods are.

    Chopra (). The shortcomings of accounting earnings motivated a number of recent papers to explore the relationship between cash flow yields and stock returns (Bernard and Stober () and Wilson ()). Rosenberg, Reid, and Lanstein () study the relationship between stock returns and the book to market ratio. 2. Revenue Surprises and Stock Returns Abstract This paper examines the relation between revenue surprises, and contemporaneous and future stock returns. It also investigates whether analysts update their earnings forecasts in response to revenue surprises in a timely and unbiased fashion. The results indicate.

    Earnings per share is the net income or earnings divided by the number of shares outstanding. This calculation puts a value on the stock share price in relation to profitability of the company. If the stock of one company has a share price of $, and the share value of another is $20, the two stocks have a similar valuation if the earnings.   Beaver () finds that trading volume and squared abnormal stock returns double around earnings announcement dates. Is the earnings number useful? Ball and Brown () find the stock return spread between “good news” and “bad news” is about 30% for the 18 months around the earnings announcement.


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The relation between stock returns and earnings by Gita R. Rao Download PDF EPUB FB2

In this paper, we investigate the relation between stock returns and β, size (ME), leverage, book-to-market equity ratio, and earnings–price ratio (E/P) in Hong Kong stock market using the Fama and French (FF) [J.

Finance 47 () ] find that two variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns Cited by:   The relationship between a company's earnings and its stock price can be complicated.

High profits don't necessarily mean a high stock price, and big losses don't always lead to a low stock price. The Relation Between Stock Returns and Accounting Earnings Given Alternative Information Robert Lipe University of Michigan ABSTRACT: This paper examines the relation between stock returns and accounting earnings under the assumption that the market observes cur-rent-period information other than earnings.

This assumption is motivated. This simple model predicts that firms with higher required equity returns, r, will have higher book‐to‐market prediction is consistent with the positive relation between average stock return and BE/ME observed by Fama and French (, ) and important for current purposes, equations and say that brief periods when equity income is expected to Cited by:   The earnings yield makes it easier to compare potential returns between, for example, a stock and a bond.

Let’s say an investor with a healthy risk appetite is trying to decide between Stock B. 2 ON THE RELATION BETWEEN EARNINGS AND RETURNS tween book and market value of equity, and between current net earn-ings (‘economic earnings’) and stock returns.

The concept of ‘permanent earnings’ is often used for earnings’ role as an indicator of future value creation. In this role the “true” value of. predictability of the earnings yield for excess stock returns.

Section 7 concludes. 2 Data and variables I use annual data on earnings (E), dividends (D), and price level (P) associated with the Standard and Poors (S&P) index. The data are available from Amit Goyal’s webpage.3 The sample is { The gross annual return is computed.

Neither book-to-market nor contributed capital-to-market carries additional information about the cross section of stock returns. Retained earnings and contributed capital factors. We next construct factors that capture the relation between average returns and the major components of book value of equity.

stems from the relation between book value and future earnings. Kothari and Shanken () find reliable evidence that book-to-market and dividend yield track time-series variation in expected real stock returns, over the periodfor the US stock market.

Specifically, we first demonstrate the relation between earnings changes and stock returns, replicating Ball and Brown (), and we compare that relation to the relation between changes in cash.

Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market.

We delve into what causes the relation between book-to-market and the cross section of stock returns. Book value of equity consists of two main components that we expect contain di er-ent information about expected returns: retained earnings and contributed capital.

Retained earnings-to-market subsumes book-to-market’s power to predict the. The relationship between earnings figures and stock returns has been a topic of international research since decades. The purpose of this paper is to.

The stock price is much more likely to reflect the high valuation, or P/E ratio, if the company has increasing revenues, or sales, to support its earnings growth, according to a article in. This simple model predicts that firms with higher required equity returns, r, will have higher book‐to‐market prediction is consistent with the positive relation between average stock return and BE/ME observed by Fama and French (, ) and important for current purposes, equations and say that brief periods when equity income is expected to.

The Difference Between Return on Equity and Earnings per Share Return on equity and earnings per share are two highly visible metrics when it comes to analyzing companies. Stock price = Book value + Predictable earnings value + Speculative value. we collected data on the stock returns for our sample companies over the period from Febru to March In a clever and useful analysis, Ronen Israel, Kristoffer Laursen, and Scott Richardson of AQR use the residual income approach to break down how the value of a company’s stock depends on three components: its book value, the value of its predictable earnings, and the value of its speculative earnings.

The first component, the book value, can be read off the balance sheet. Relationship between price earning ratio and stock returns There have been a large number of literatures during the past years on price earnings and stock return. The existing literatures propose different theories to how the price earning ratio may affect the performance of a company and also the factors that may influence it.

future stock returns. Hence, the predictive power of quality measures for stock returns can be attributed to their predictive power for future earnings growth. We also show that there is no causal relation between the quality premium and distress risk.

While large unsigned NBTDs appear to enhance the earnings-returns relation, we find no evidence that large unsigned ABTDs affect the earnings-returns relation. Overall, the results suggest that the differing components of BTDs have differential implications for earnings .FacultyWorkingPaper COPY2 TheRelationBetweenStockReturnsandEarnings: AStudyofNewly-PublicFirms DepartmentofAccountancy.stock returns after controlling for the REM characteristics in either cross-sectional regressions or double-sorted quintile portfolios.

Third, a necessary condition for the mispricing explanation is the existence of a significant relation between the levels of these REM measures and future period earnings and cash flows.