Accounting Measurement, Price-Earnings Ratio, and the Information Content of Security Prices

A Hybrid Value Investing Method for the Evaluation of Banking Stocks

“…This approach suggests investors to find undervalued stocks and hold those value stocks until prices come back to fair level [1]. Ou and Penman [9] used a model to capture future change in earnings by using a set of historical financial ratios. Lev and Thiagarajan [10] choose 12 financial signals for similar purpose.…”

“…Prior researches show that investors have chance to gain positive abnormal returns by trading on useful financial performance signals [9], [10]. Those approaches assume that market is not always in equilibrium, and sometimes the market cannot fully process the implications of a firm's financial signals, fails to reflect its fair price in a timely manner.…”

The Prediction of Earnings Movements Using Accounting Data: Using XBRL

“…Sletten et al find that earnings informativeness is higher in bad-news periods than in good-new periods [12]. Alam et al were able to show that disaggregated earnings data were better able to predict next period's earnings in the banking industry [13].Ou et al were the first researchers to focus on the usefulness of accounting information to predict the direction of movement of earnings relative to trend adjusted current earnings [10,14]. The study is important because it evaluates whether accounting information can consequently be used as the basis for profitable investment strategy.…”

“…XBRL allows the expression of semantic meaning commonly required in business reporting. One use of XBRL is to define and exchange financial information, such as a financial statement [10,14].The SEC has created the XBRL US GAAP Financial Reporting Taxonomy. This taxonomy is a collection of accounting data concepts and rules that enables companies to present their financial reports electronically.…”

“…While earlier research has only been able to show relatively low informativeness of earnings later studies were able to show the incremental information content of specific components of the financial statements [4][5][6][7]. For example, Finger et al show that earnings provide information for future earnings and cash flows, and predict sign changes in the earnings per share using forecasting models developed from various income statement and balance sheet components [8][9][10]14]. Shroff et al assess the predictive ability of a "composite" model, which forecasts as a function of current earnings and current security prices, against three univariate benchmarks: a random walk model, a random walk with drift model, and a first order autoregressive/moving average (ARIMA) model [11].…”