Abstract
The paper explores the relationship between accounting information and stock returns of the companies listed on the Athens Stock Exchange (ASE) in the period 1998–2008. Publicly available financial data on the companies included in the ASE during 1998–2008 have been collected and processed. The data sample consists of 245 companies and varies from 2,166 to 1,441 firm-year observations. The research methodology has been based on the extension of the model introduced by Kothari and Sloan (1992) and investigates whether the level of earnings divided by price at the beginning of the stock return period is associated with returns in the context of ‘prices lead earnings’ using annual and quarterly data. Cross-sectional regression analysis points to a significant relationship between earnings and returns on measurement windows of one year and longer. Similar results have been found in the case of a cumulative model where earnings are aggregated up to four years; however, relationship in the short measurement window up to three quarters has resulted in low earnings response coefficients.
Highlights
A fundamental issue of economics, finance and accounting involves the relation between the firm’s reported earnings and its stock returns (Kormendi, Lipe 1987)
Journal of Business Economics and Management, 2013, 14(2): 414–431 ported accounting earnings are directly related to future dividends and cash flows
In the late 1980s, researchers started investigating a new area – the earnings response coefficient (ERC) that is theoretically defined as “a change in the price induced by a one-dollar change in current earnings” (Collins, Kothari 1989) and typically measured as a slope coefficient in a regression of stock returns on unexpected earnings (Markowitz 1952, 1959)
Summary
A fundamental issue of economics, finance and accounting involves the relation between the firm’s reported earnings and its stock returns (Kormendi, Lipe 1987). Standard valuation models assume that price is the discount present value of future expected dividends or future cash flows. Journal of Business Economics and Management, 2013, 14(2): 414–431 ported accounting earnings are directly related to future dividends and cash flows. While the studies on the average price-to-earnings ratio (Stankevičienė, Gembickaja 2012) are concentrated on market reactions to earnings announcements, the studies on the earnings response coefficient are more interested in the nature of information about reported earnings and how they are related to firm valuation (Kormendi, Lipe 1987)
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