Post-earnings-announcement drift

About: Post-earnings-announcement drift is a research topic. Over the lifetime, 1399 publications have been published within this topic receiving 97371 citations.

An empirical evaluation of accounting income numbers

Abstract: Accounting theorists have generally evaluated the usefulness of accounting practices by the extent of their agreement with a particular analytic model. The model may consist of only a few assertions or it may be a rigorously developed argument. In each case, the method of evaluation has been to compare existing practices with the more preferable practices implied by the model or with some standard which the model implies all practices should possess. The shortcoming of this method is that it ignores a significant source of knowledge of the world, namely, the extent to which the predictions of the model conform to observed behavior. It is not enough to defend an analytical inquiry on the basis that its assumptions are empirically supportable, for how is one to know that a theory embraces all of the relevant supportable assumptions? And how does one explain the predictive powers of propositions which are based on unverifiable assumptions such as the maximization of utility functions? Further, how is one to resolve differences between propositions which arise from considering different aspects of the world? The limitations of a completely analytical approach to usefulness are illustrated by the argument that income numbers cannot be defined substantively, that they lack "meaning" and are therefore of doubtful utility.' The argument stems in part from the patchwork development of account-

Size and Book-to-Market Factors in Earnings and Returns

Abstract: We study whether the behavior of stock prices, in relation to size and book-tomarket-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns. FAMA AND FRENCH (1992) FIND that two variables, market equity (ME) and the ratio of book equity to market equity (BE/ME) capture much of the crosssection of average stock returns. If stocks are priced rationally, systematic differences in average returns are due to differences in risk. Thus, with rational pricing, size (ME, stock price times shares outstanding) and BE/ME must proxy for sensitivity to common risk factors in returns. Fama and French (1993) confirm that portfolios constructed to mimic risk factors related to size and BE/ME add substantially to the variation in stock returns explained by a market portfolio. Moreover, a three-factor asset-pricing model that includes a market factor and risk factors related to size and BE/ME seems to capture the cross-section of average returns on U.S. stocks. The evidence that size and book-to-market-equity proxy for sensitivity to risk factors in returns is consistent with a rational-pricing story for the role of size and BE/ME in average returns. But return tests cannot tell a complete economic story. Size and BE/ME remain arbitrary indicator variables that, for unexplained economic reasons, are related to risk factors in returns. The goal here is to begin to fill this economic void. Specifically, we study whether the behavior of stock prices, in relation to size and book-tomarket-equity, is consistent with the behavior of earnings. We first ask whether stock prices properly reflect differences in the evolution of profitability when stocks are grouped on size and BE/ME. We confirm that, as predicted by simple rational-pricing models, BE/ME is related to

Do Stock Prices Fully Reflect Information in Accruals and Cash flows about Future Earnings

Abstract: This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Abstract: Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.