Journal ArticleDOI
A nonlinear model of security price responses to unexpected earnings
Robert N. Freeman,Senyo Y. Tse +1 more
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In this article, the marginal response of stock price to unexpected earnings declines as the absolute magnitude of unexpected earnings increases, and the absolute value of unexpected returns is negatively correlated with earnings persistence.Abstract:
This study presents evidence that the marginal response of stock price to unexpected earnings declines as the absolute magnitude of unexpected earnings increases. Most previous studies assume a linear relation between unexpected returns (UR) and unexpected earnings (UE). The constant marginal response of prices to earnings in linear models is typically referred to as the earnings response coefficient (ERC) and estimated as the slope coefficient from simple linear regression of UR on UE. Relative to the linear model, a nonlinear approach provides both significantly higher explanatory power and a richer explanation for differences between ERCs and price-earnings ratios. The nonlinear relation described in this paper rests on the premise that the absolute value of unexpected earnings is negatively correlated with earnings persistence. Valuation theory suggests that analysts and investors should place greater emphasis on forecasting high-persistence earnings than low-persistence earnings, because a given amount of the former has a greater valuation impact than the same amount of theread more
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Performance matched discretionary accrual measures
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The conservatism principle and the asymmetric timeliness of earnings1
TL;DR: In this paper, the authors interpret conservatism as resulting in earnings reflecting "bad news" more quickly than "good news" and find that negative earnings changes are less persistent than positive earnings changes.
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The information content of losses
TL;DR: In this article, the authors hypothesize that losses are less informative than profits about the firm's future prospects, and they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses.
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Capital markets research in accounting
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Journal ArticleDOI
The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting
TL;DR: In this paper, the authors evaluate the literature that assesses the usefulness of accounting numbers on their stock market value association and conclude that the literature provides little insight for standard-setting purposes.
References
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Book
The Theory and Practice of Econometrics
TL;DR: The Classical Inference Approach for the General Linear Model, Statistical Decision Theory and Biased Estimation, and the Bayesian Approach to Inference are reviewed.
Journal ArticleDOI
Dividend Policy under Asymmetric Information
Merton H. Miller,Kevin Rock +1 more
TL;DR: In this article, the authors extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the managers to know more than outside investors about the true state of the current earnings.
Journal ArticleDOI
Several tests for model specification in the presence of alternative hypotheses
TL;DR: In this paper, several procedures are proposed for testing the specification of an econometric model in the presence of one or more other models which purport to explain the same phenomenon.
Journal ArticleDOI
Earnings innovations, earnings persistence, and stock returns
R Konnendi,Robert C. Lipe +1 more
TL;DR: In this article, the authors examine whether the magnitude of the effect of unexpected earnings on stock returns is correlated with the presen t value of revisions in expected future earnings derived from a univa riate time-series model.
Journal ArticleDOI
Cross-sectional variation in the stock market response to accounting earnings announcements☆
TL;DR: In this article, a random coefficient regression model is used to interpret multiple regression models that relate abnormal returns to unexpected earnings and other information variables, and the results show that the model is consistent with these predictions.