The Estimation and Determinants of Associations between Returns and Earnings: Evidence from Cross-Industry Comparisons
Posted: 2 Nov 2010 Last revised: 2 Oct 2017
Date Written: January 1, 1991
Abstract
Associations between accounting earnings and stock returns are modeled and tested by examining relationships between earnings response coefficients and industry structure characteristics. Response coefficients are estimated using a new approach that does not require proxies for market earnings expectations, This approach appears to be well specified relative to a traditional approach and may have wider applicability in other research contexts. A randomization procedure for controlling for returns dependence is also applied. The results suggest that response coefficients differ considerably across industries and that these differences are related to industry entry barriers, product type, growth, financial leverage, and operating leverage.
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