How Naive Is the Stock Market's Use of Earnings Information?

Ray Ball

University of Chicago

Eli Bartov

New York University

Rendleman Jones and Latane (1987) and Bernard and Thomas (1990) report evidence supporting their hypothesis that investors use a "naive" seasonal random walk model in forming expectations of quarterly earnings. Using the Bernard and Thomas (1990) data we show that the market acts as if it: (1) does not use a seasonal random walk model; (2) does incorporate past earnings changes in forming expectations; (3) does use the correct signs in exploiting serial correlation in seasonally-differenced quarterly earnings; but (4) underestimates the magnitude of the serial correlation. This evidence remains anomalous in the sense that it is consistent with neither the theory of efficient markets nor the "naive expectation model" hypothesis nor "behaviorial finance" theories.

JEL Classification: G41

Not Available For Download

Date posted: February 24, 1998  

Suggested Citation

Ball, Ray and Bartov, Eli, How Naive Is the Stock Market's Use of Earnings Information?. Available at SSRN: http://ssrn.com/abstract=55467

Contact Information

Ray Ball (Contact Author)
University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-5941 (Phone)
773-702-0458 (Fax)
Eli Bartov
New York University ( email )
40 W. 4th St., 423
New York, NY 10012
United States
212-995-4004 (Fax)
Feedback to SSRN

Paper statistics
Abstract Views: 2,727
People who downloaded this paper also downloaded:
1. How Banks go Abroad: Branches or Subsidiaries?
By Eugenio Cerutti, Maria Martinez Peria, ...

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.375 seconds