Evidence that stock prices do not fully reflect the implications of current earnings for future earnings

Bernard, Victor L.; Thomas, Jacob K.

doi:10.1016/0165-4101(90)90008-r

Cited by 1,781 publications

(968 citation statements)

References 27 publications

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“…For larger FTSE 100 firms, the earnings-related news does not have a significant effect on next-period abnormal returns. This result corroborates the findings of Bernard and Thomas (1990) that large firms, due to high investor recognition, tend to have less post-announcement drift. Further, when we consider the relationship between media coverage (MC) and next-period abnormal returns, we see the significant impact of highly visible good news on next-period returns (seen in table 3 for ALL stories) is driven by larger FTSE 100 9.…”

Section: Return Predictability Of News Media Contentsupporting

confidence: 82%

Media Content and Stock Returns: The Predictive Power of Press

Ferguson¹,

Philip²,

Lam³

et al. 2015

MFJ

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The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-pro t purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. Jie Michael Guo Durham Univercity Business School, UKThis paper examines whether tone (positive and negative) and volume of firm-specific news media content provide valuable information about future stock returns, using UK news media data from 1981-2010. The results indicate that both tone and volume of news media content significantly predict next period abnormal returns, with the impact of volume more pronounced than tone. Additionally, the predictive power of tone is found to be stronger among lower visibility firms. Further, the paper finds evidence of an attention-grabbing effect for firm-specific news stories with high media coverage, mainly seen among larger firms. A simple news-based trading strategy produces statistically significant risk-adjusted returns of 14.2 to 19 basis points in the period [2003][2004][2005][2006][2007][2008][2009][2010]. At the aggregate level, price pressure induced by semantics in news stories is corrected only in part by subsequent reversals. Overall, the findings suggest firm-specific news media content incorporates valuable information that predicts asset returns. (JEL: G1, G14, G17)

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Section: Return Predictability Of News Media Contentsupporting

confidence: 82%

Media Content and Stock Returns: The Predictive Power of Press

Ferguson¹,

Philip²,

Lam³

et al. 2015

MFJ

View full text Add to dashboard Cite

show abstract

“…Third, the results are unlikely to be explained by risk. As an example, Liu, Whited and Zhang (2007) propose a rational risk-based explanation for the earnings-announcement drift of Bernard and Thomas (1990) and Sloan (1996).…”

Section: Introductionmentioning

confidence: 99%

“…These components (Manufacturers' New Orders for Consumer Goods and Materials, Manufacturers' New Orders for Nondefense Capital Goods, and the Personal Consumption Expenditure Deflator used to get real Money Supply (M2)) are estimated using a simple AR(2) time series regression. 5 The Appendix provides more background information and details on why this procedure was selected and how it was implemented by TCB. It is important to note that the procedures used in the LEI calculation are explained with extensive details on TCB's website and in their manual (The Conference Board (2001)), which is publicly available.…”

Section: The Leading Economic Indexmentioning

confidence: 99%

Investor Inattention and the Market Impact of Summary Statistics

et al. 2012

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Investors with limited attention have an incentive to focus on summary statistics rather than individual pieces of information. We use this observation to form a test of the impact of limited attention on the aggregate stock market. We examine the market response to a macroeconomic release that is purely a summary statistic, the U.S. Leading Economic Index (LEI). Consistent with the limited attention hypothesis, we show that the LEI announcement has an impact on aggregate stock returns, return volatility, and trading volume.

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“…PER is standardized rank of earnings persistence based on AR (1) The results documented in Table 4 do not confirm the expectation of a negative effect of earnings persistence on short-term components and/or a positive effect on long-term components. One possible explanation presented by the literature is that market agents fail to fully recognize the implication of earnings persistence for future earnings (Bernard & Thomas, 1990;Chen, 2013).…”

Section: Firm Value Decomposition: Level Price Regressionsmentioning

confidence: 99%

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

Pimentel

Aguiar

2016

Rev. adm. empres.

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Based on the assumption that earnings persistence has implications for both financial analysis and compensation contracts, the aim of this paper is to investigate the role of earnings persistence assuming that (i) more persistent earnings are likely to be a better input to valuation models and (ii) more persistent earnings are likely to serve as a proxy for long-term market and managerial orientation. The analysis is based on Brazilian listed firms from 1995 to 2013, and while we document strong support for the relevance of earnings persistence in financial analysis and valuation, we fail to document a significant relationship between earnings persistence and long-term value orientation. These results are sensitive to different specifications, and additional results suggest that firms' idiosyncratic risk (total risk) is relevant to explain the focus on short-term outcomes (short-termism) across firms. The main contribution of this paper is to offer empirical evidence for the relevance of accounting numbers in both valuation and contractual theories in an emergent market.

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Evidence that stock prices do not fully reflect the implications of current earnings for future earnings

Cited by 1,781 publications

References 27 publications

Media Content and Stock Returns: The Predictive Power of Press

Media Content and Stock Returns: The Predictive Power of Press

Investor Inattention and the Market Impact of Summary Statistics

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

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