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

Abstract

<jats:p>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.</jats:p>