Quarterly earnings reports and intermediate stock price trends
About: This article is published in Journal of Finance.The article was published on 1970-03-01. It has received 183 citations till now. The article focuses on the topics: Earnings per share & Cost price.
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TL;DR: This paper reviewed empirical research on the relation between capital markets and financial statements and found that the principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.
1,873 citations
TL;DR: In this paper, the authors investigate whether the simple one-period capital asset pricing model (CAPM) is misspecified or capital markets are inefficient, and find that portfolios based on firm size or earnings/price (E/P) ratios experience average returns systematically different from those predicted by the CAPM.
1,331 citations
TL;DR: Chan et al. as discussed by the authors showed that deviations from the linear CAPM risk-return trade-off are related to, among other variables, firm size, earnings yield, leverage, and the ratio of a firm's book value of equity to its market value.
Abstract: Our examination of the cross-section of expected returns reveals economically and statistically significant compensation (about 6 to 9 percent per annum) for beta risk when betas are estimated from time-series regressions of annual portfolio returns on the annual return on the equally weighted market index. The relation between book-to-market equity and returns is weaker and less consistent than that in Fama and French (1992). We conjecture that past book-to-market results using COMPUSTAT data are affected by a selection bias and provide indirect evidence. AN EXTENSIVE BODY OF empirical research over the past 10 to 15 years has provided evidence contradicting the prediction of the Sharpe (1964), Lintner (1965), and Black (1972) capital asset pricing model (CAPM) that the crosssection of expected returns is linear in beta. This research documents that deviations from the linear CAPM risk-return trade-off are related to, among other variables, firm size (e.g., Banz (1981)), earnings yield (e.g., Basu (1977, 1983)), leverage (e.g., Bhandari (1988)), and the ratio of a firm's book value of equity to its market value (e.g., Stattman (1980), Rosenberg, Reid, and Lanstein (1985), and Chan, Hamao, and Lakonishok (1991)). After carefully reexamining this research, a recent article by Fama and French (FF; 1992) draws two main conclusions about the cross-section of average stock returns. First, there is only a weak positive relation between average return and beta over the period 1941 to 1990, and virtually no relation over the shorter period 1963 to 1990. Second, firm size and book-to-market equity (B/M) do a good
1,111 citations
TL;DR: In this article, the authors examined whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements, and they concluded that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.
Abstract: This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. We present evidence that analysts' forecasts underreact to recent earnings. This feature of the forecasts is consistent with certain properties of the naive seasonal random walk forecast that Bernard and Thomas (1990) hypothesize underlie the well-known anomalous post-earnings-announcement drift. However, the underreactions in analysts' forecasts are at most only about half as large as necessary to explain the magnitude of the drift. We also document that the “extreme” analysts' forecasts studied by DeBondt and Thaler (1990) cannot be viewed as overreactions to earnings, and are not clearly linked to the stock price overreactions discussed in DeBondt and Thaler (1985, 1987) and Chopra, Lakonishok, and Ritter (Forthcoming). We conclude that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.
952 citations
TL;DR: This paper reviewed empirical research on the relation between capital markets and financial statements and found that the principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.
Abstract: I review empirical research on the relation between capital markets and financial statements. The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process. The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting. Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial disclosure decisions.
916 citations
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TL;DR: This paper showed that the text, first written in 1964, is still relevant and relevant at the beginning of the 21st century, which is known to a generation of financial economists having marked the beginnings of the field known as financial econometrics.
Abstract: This work is known to a generation of financial economists having marked the beginnings of the field known as financial econometrics. This edition sets out to show that the text, first written in 1964, is still relevant is still relevant at the beginning of the 21st century.
886 citations
TL;DR: In this article, the authors describe the results of an extensive empirical investigation of the relationship of earnings/price and earnings change ratios to subsequent stock price performance, and the results allow a comparison of the usefulness of two basically different variables for predicting future price changes.
Abstract: THE PURPOSE of this paper is to describe the results of an extensive empirical investigation of the relationship of earnings/price and earnings change ratios to subsequent stock price performance. The results allow a comparison of the usefulness of two basically different variables for predicting future price changes: a fundamental variable where earnings are considered relative to price, and a trend variable where earnings movements are considered without regard to price. Both deseasonalized and non-deseasonalized (unadjusted) earnings per share are employed. The original purpose of the paper was to see if an "information effect" existed for quarterly data similar to that reported on earlier by the authors for annual data.' The annual data studies had shown that future period earnings (for example, relative to current price) were more valuable as predictors of future price changes than current period earnings which were in turn more valuable than previous period earnings. In fact, the latter variable-the only one known to the investor when he had to make his decision-was found to be of little value in selecting stocks for above average price appreciation. It was hypothesized that this same information effect would be found by employing leads and lags in the quarterly data, although more favorable results from known (previous quarter) earnings information were hoped for. The results were more striking than were anticipated.
18 citations
TL;DR: In this paper, a quantitative analysis of annual price ratios of common stocks is presented, showing that the interquartile spread or difference between the percentage price change of the upper and lower quartile stocks was relatively large at about 30 percentage points and fairly stable over the years reported on.
Abstract: This paper is a quantitative analysis of annual price ratios of common stocks. The price ratio, Pt+l/Pt, is the ratio of price at the beginning of year t + 1 to price at the beginning of year t.0 Cross-section correlation coefficients between price ratios and other selected variables are derived for two samples of common stocks; these coefficients are then tested for stability over time. Finally the ability of the explanatory variables to discriminate between the best and poorest price performers is investigated. Table I shows the distribution of price ratios for a broad range of common stocks. The table was constructed from data taken from the New York Stock Exchange fact book and indicates the distribution of percentage price changes of all listed common stocks in years ended December 31, 1956 through December 31, 1963. As the table shows, the interquartile spread or difference between the percentage price change of the upper and lower quartile stocks was relatively large at about 30 percentage points and fairly stable over the years reported on. This consistent annual pattern of interquartile spreads is to be contrasted with the wide year-to-year variation in the median percentage price change, indicating there is a strong intercorrelation among stock price movements. In other words, most stock prices either move up together or down together in any particular year, but whichever is the case the percentage point difference between the typical large price change and the typical small price change remains about the same. Therefore if an investor can discrim-
13 citations