The Influence of Sustainable Earnings on Stock Price: Evidence from Publicly Listed Vietnamese Business Enterprises

Nhung Hong Do,Nha Van Tue Pham

doi:10.21315/aamjaf2020.16.2.5

Abstract

Expected earnings and stock price are important determinants of investors’ decision. This research is conducted to estimate earnings persistence and examine the relationship between sustainable earnings on price-to-earning (P/E) ratio based on financial statements’ information of 631 publicly listed non-financial companies on Vietnam’s stock market, by using Ordinary Least Squares (OLS) and Logit function. The results show that earnings persistence depends on net operating assets growth, profit margin changes, operating asset turnover changes and past profitability. Besides, both the sustainable and unsustainable components of earnings growth are proved to empirically affect P/E ratio, even though investors underreact to sustainable earnings and overreact to unsustainable earnings. This study helps to improve investors’ perception of their future earnings, investment value and companies’ sustainable growth, particularly in the context of developing stock market of Vietnam which is full of market anomalies.

Highlights

Earnings persistence has its roots from works of profit forecast, which provides the basis for security valuation and business enterprise valuation in the context of investment decision making
The above correlation matrix shows that all correlation coefficients are low, the model does not suffer from serious multicollinearity
It is necessary to study the relationship between earnings persistence and P/E ratio, which is a proxy of investors’ perception of company’s perspective

Summary

Introduction

Earnings persistence has its roots from works of profit forecast, which provides the basis for security valuation and business enterprise valuation in the context of investment decision making. The fair price of a stock can be determined by different versions of the discounted earnings model, which requires prediction of firm’ future earnings. Every prediction of future earnings needs to be based on current earnings. Researchers came up with a variety of methods to estimate future profit based on current profit (Brownlee, Ferris, & Haskins, 1990; Damodaran, 1999; Graham, Dodd, & Cottle, 1962; Haskins, Ferris, Sack, & Allen, 1993; Kieso & Weygandt, 1995). Future profit tends to be easier to predict, given more earnings persistence. If firm’s current profit is highly temporary, it is more difficult to have an accurate forecast of future earnings

Methods

Results

Conclusion