Earnings Asan Explanatory Variable for Returns

Easton, Peter D.; Harris, Trevor S.

doi:10.2307/2491026

Cited by 905 publications

(728 citation statements)

References 15 publications

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“…This table presents the results of the regression model that examines the effect of antitakeover laws on the informativeness of accruals and cash flow based on the approach of Easton and Harris (1991). The dependent variable is cumulative return starting three months after fiscal year end t-1 to six months after fiscal year end t. EARN is the firm's earnings in year t scaled by its assets at the end of year t-1.…”

Section: Table 2 Summary Statisticsmentioning

confidence: 99%

Corporate governance and the information environment: Evidence from state antitakeover laws

Armstrong

Balakrishnan

Cohen

2012

Journal of Accounting and Economics

291

118

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We examine the relation between corporate governance and firms' information environments. We use the passage of state antitakeover laws in the U.S. as a source of exogenous variation in an important governance mechanism to identify changes in firms' information environments. We find that information asymmetry and private information gathering decreased and that financial statement informativeness increased following the passage of the antitakeover laws. Cross-sectional analyses indicate that the increased level of financial statement informativeness is attributable to firms that are most likely to access equity markets rather than managerial entrenchment, managerial career concerns, or managers' pursuit of the quiet life. Abstract: We examine the relation between corporate governance and firms' information environments. We use the passage of state antitakeover laws in the U.S. as a source of exogenous variation in an important governance mechanism to identify changes in firms' information environments. We find that information asymmetry and private information gathering decreased and that financial statement informativeness increased following the passage of the antitakeover laws. Cross-sectional analyses indicate that the increased level of financial statement informativeness is attributable to firms that are most likely to access equity markets rather than managerial entrenchment, managerial career concerns, or managers' pursuit of the quiet life.Keywords: antitakeover laws; corporate governance; financial reporting quality; information asymmetryWe are grateful to Soren Hvidkjaer for providing data on the Probability of Informed Trade. This paper has benefitted from feedback from Ashiq Ali, Anne Beatty, Donal Byard, John Core, Umit Gurun, Raffi Indjejikian, Ilan Kremer, Edward Li, Stan Markov, Ed Owens, Cathy Schrand, Nemit Shroff, Ross Watts (editor), Joanna Wu, Tzachi Zach, Helen Zhang, and an anonymous referee. We also thank seminar participants at

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Section: Table 2 Summary Statisticsmentioning

confidence: 99%

Corporate governance and the information environment: Evidence from state antitakeover laws

Armstrong

Balakrishnan

Cohen

2012

Journal of Accounting and Economics

291

118

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“…This is not more tautological than explaining stock return by accounting return; see e.g. Easton and Harris (1991). The fact that we do not obtain results with unreasonably high R 2 -values, also indicates sound models in this respect; see Table 4.…”

Section: Hypotheses and Test Methodologymentioning

confidence: 49%

“…7 An examination of the value-relevance of competitive advantage, specified by regression (3), is closely related to the literature testing the value-relevance of various performance metrics, such as firm return or abnormal firm return. Easton and Harris (1991), and most of the literature on the value-relevance of accounting information, demonstrate that accounting earnings and changes in such earnings, deflated by the stock price, are highly relevant for explaining abnormal stock market return. In large samples, the accounting return on market-based equity typically explains about 8-10% of abnormal stock market return, measured on an annual basis.…”

Section: Hypotheses and Test Methodologymentioning

confidence: 99%

Evidence on competitive advantage and superior stock market performance

2010

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“…Miller and Modigliani, 1961) and empirical (e.g. Easton and Harris, 1991). Another theoretical perspective on the market-accounting value relationship is provide by Penman (1992), who also argued for a "return to fundamentals."…”

Section: Literaturementioning

confidence: 99%

Salient accounting value drivers and equity re-turns : Evidence from US industries

Camara

2017

IJAES

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Past literatures suggest the presence of ubiquitous disquiet among corporate financial managers, financial analysts and portfolio managers that changes in certain accounting variable's results in changes in stock prices, irrespective of whether future cash flow's subsume these changes in salient accounting variables. Using an empirical rational inquiry, this paper attempts to test whether there is any relationship between salient accounting variables and equity returns for five major US industries (Manufacturing, Services, Wholesale, Constructions and Retail) from the period 1996 to 2015, and as a result, may contribute to accretion or loss in stockholders’ wealth. To account for divergent industry-specific revenue generating process and the existing fluidity in industry-specific application of accounting standards, this study thus disaggregates sample data by industry. The industry approach implies that the effect of salient accounting variables on equity prices may be described as a conflation of industry-specific characteristics and capital market synergies. Consistent with this notion, this study finds that salient accounting variables which are used to measure operating performance, growth opportunities, investment management and profitability have the significant impact on equity returns. However, and most importantly, the study finds that the impact of the salient accounting variables varies from one industry to another. As such, this study is particularly useful for equity market participants in the identification of industry related, market-relevant accounting variables, which may be used to guide future financial policies.

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Earnings Asan Explanatory Variable for Returns

Cited by 905 publications

References 15 publications

Corporate governance and the information environment: Evidence from state antitakeover laws

Corporate governance and the information environment: Evidence from state antitakeover laws

Evidence on competitive advantage and superior stock market performance

Salient accounting value drivers and equity re-turns : Evidence from US industries

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