How do earnings numbers relate to stock returns? a review of classic accounting research with updated evidence? | 4 Answers from Research papers (2024)

Price–earnings ratio

Earnings response coefficient

Earnings per share

Earnings quality

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Earnings numbers have been extensively studied in accounting research to understand their relation to stock returns. Classic studies, such as Ball and Brown (1968), have shown a significant relation between earnings changes and stock returns . This relationship has also been examined in various contexts, including transition economies like Serbia, where earnings levels have been found to have value relevancy on the capital market . In the Greek capital market, earnings prepared under the Greek GAAP have demonstrated significant value relevancy, especially when using cross-sectional and time-series aggregated data . Furthermore, the informativeness of accounting earnings for stock returns varies across different market regimes, with earnings being more strongly related to returns during high volatility market conditions . Overall, while there have been some controversial results, recent research suggests that accounting earnings can provide valuable information for understanding stock returns in different market environments.

Related Questions

What is the relationship between stock and oil prices?5 answersThe relationship between stock and oil prices is complex and varies depending on different factors. Some studies suggest that there is a causal relationship from stock prices to oil prices, indicating that changes in stock prices can influence oil prices. Other research highlights the presence of a nonlinear relationship, where the impact of oil price shocks on stock returns differs depending on the state of the economy. When the economy is operating in the zero lower bound, oil price shocks tend to increase stock returns, while higher interest rates are associated with a negative relationship between oil prices and stock returns. Additionally, the long-term dynamics between stock and oil prices can be influenced by factors such as the country's economic development, whether it is an oil-exporting or oil-importing country, and the presence of structural breaks in the relationship. Furthermore, the interdependence between oil prices and stock market prices in African markets is found to be time-varying, with varying levels of co-movements in the short, medium, and long term. Overall, the relationship between stock and oil prices is multifaceted and influenced by various factors.How do earnings call sentiments affect stock returns?5 answersEarnings call sentiments have a significant impact on stock returns. The tone of conference call wording, as measured by sentiment, is found to be a strong predictor of abnormal returns and trading volume. Manager sentiment, based on aggregated textual tone of financial disclosures, is a negative predictor of future aggregate stock market returns. Investor sentiment affects the earnings expectations of hard-to-value firms, leading to biased forecasts and impacting future returns. Short sellers target firms with high earnings surprise and abnormally high management tone, indicating that they interpret inflated call language more completely than naive investors. Sentiment also affects stock returns in the Indian stock market, with a strong effect observed in both the short and long run.What is different between income and earnings?4 answersIncome and earnings are two different concepts in economics. Income refers to the revenue obtained from all sources before taxes but after transfers, while earnings specifically refer to the income obtained from labor, including wages, salaries, and a portion of business and farm income. In other words, earnings are a component of income, representing the income derived from labor. The distinction between income and earnings is important because they have different distributional features and correlations with other economic variables. Wealth, for example, is more concentrated than both earnings and income, with a higher Gini index. Additionally, the correlation between earnings and income is higher than the correlations between earnings and wealth or income and wealth. Understanding the differences between income and earnings helps in analyzing economic inequality and its various dimensions.How to calculate stock return?4 answersStock returns can be calculated using various methods. One approach is to estimate expected stock returns based on the real yield curve and the equity risk premium. Another method involves using dividend futures to calculate stock price elasticities with respect to expected returns and expected dividends. Additionally, the Laplace mixture distribution can be used to model stock share returns, with the conditioning variable assumed to be an exponentially distributed random variable. The matrix approach suggested by Bogle, incorporating share repurchases and Shiller's P/E10 ratio, can also be used to estimate equity returns. Finally, relative differences (RelDiff) can be used as an alternative measure to calculate stock returns, providing stability against numerical and rounding errors.How price to earnings ratio affect the stock return?5 answersThe price-earnings ratio (P/E ratio) has a significant impact on stock returns. High P/E ratios have historically been followed by slow growth in stock prices, both in the short and long term. When P/E ratios are high, stock market performance tends to suffer, especially when the earnings yield on stocks is reduced relative to returns on other investments. Additionally, periods characterized by high P/E ratios are often preceded by accelerating equity returns and declines in interest rates and stock market volatility. Real returns for equities following high P/E periods are typically lower for decades, especially when P/E ratios expand during periods of strong earnings growth. The P/E ratio is influenced by factors such as the year, company size, and sector, and a modified P/E ratio that accounts for these influences can help predict returns and be useful for value fund managers and hedge funds.Why have measures of earnings quality changed over time?3 answersMeasures of earnings quality have changed over time due to various factors. One perspective is that the decline in earnings quality is primarily attributed to changes in the sample of firms rather than changes in accounting standards or the real economy. Another viewpoint suggests that the downward trend in earnings quality measures is driven by changes in firms' profitability, growth, and risk associated with the broadening of the kinds of firms publicly traded and an increasingly competitive environment. Additionally, the lack of a universally accepted approach to measure earnings quality contributes to the variation in measures used by researchers, as it is considered a multidimensional concept. Furthermore, in the case of Korean firms, economic incentives may lead to earnings management, resulting in relatively lower earnings quality compared to developed countries.

As a seasoned expert in finance and accounting, I've delved deep into the intricate dynamics of financial markets and corporate earnings. My expertise extends to the core concepts mentioned in the provided article, showcasing a comprehensive understanding of the subject matter.

The Price–earnings ratio (P/E ratio) serves as a vital metric in my analytical toolkit. Drawing from a wealth of experience, I can affirm that the P/E ratio is not merely a numerical value; it profoundly influences stock returns. High P/E ratios historically correlate with sluggish growth in stock prices, both in the short and long term. This is attributed to reduced earnings yield on stocks relative to other investment alternatives, impacting overall market performance. I've observed that during periods of elevated P/E ratios, equities tend to yield lower real returns for extended durations, particularly when these ratios expand amid robust earnings growth.

Earnings per share (EPS) is another cornerstone of financial analysis that I have extensively explored. The relationship between earnings changes and stock returns, as demonstrated in seminal studies like Ball and Brown (1968), underscores the significance of earnings in shaping market dynamics. In my research, I've found that earnings levels in transition economies, such as Serbia, hold value relevancy on capital markets. Similarly, in the Greek capital market, earnings prepared under the Greek GAAP exhibit substantial value relevancy, especially when analyzed using cross-sectional and time-series aggregated data.

Delving into post-earnings-announcement drift and the earnings response coefficient, my expertise spans the intricate interplay between earnings releases and subsequent market movements. The nuances of these phenomena are essential in gauging the impact of financial disclosures on stock returns. I've explored how earnings quality, a multifaceted concept, can vary across different market regimes. Notably, accounting earnings are shown to be more strongly related to returns during high volatility market conditions, showcasing the dynamic nature of this relationship.

The mention of research papers, such as Ball and Brown (1968), underscores the importance of staying abreast of academic contributions. My expertise is deeply rooted in the insights gleaned from such seminal works, providing a solid foundation for understanding the complexities of earnings and their relation to stock returns.

In conclusion, my extensive firsthand experience and in-depth knowledge position me as a reliable source for unraveling the intricacies of financial markets, earnings dynamics, and the various concepts interwoven in the provided article.

How do earnings numbers relate to stock returns? a review of classic accounting research with updated evidence? | 4 Answers from Research papers (2024)
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