Does Earnings Acceleration Convey Information?

48 Pages Posted: 30 Mar 2007 Last revised: 14 Apr 2011

See all articles by Ying Cao

Ying Cao

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: April 2011

Abstract

Valuation theory, investment managers, financial analysts, and textbooks advocating horizontal financial statement analysis suggest that the change in earnings growth (earnings acceleration) conveys value relevant information. We test this assertion using a large sample of U.S. firms. Results from cross-sectional short-window (around earnings announcements) and long-window (annual) returns-earnings regressions reveal a strong association between contemporaneous returns and earnings acceleration after controlling for earnings levels and changes. Moreover, earnings acceleration is useful in predicting future earnings, and financial analysts appear to use the information in earnings acceleration in addition to earnings levels and changes in revising their forecasts. Furthermore, earnings acceleration conveys information incremental to that provided by changes in analysts’ forecasts of long-term earnings growth. This study extends the empirical returns-earnings model that includes only earnings levels and changes and shows that more useful information can be extracted from reported earnings numbers than has been previously documented.

Keywords: earnings acceleration, earnings growth, earnings prediction, stock returns

JEL Classification: G14, M41, M43, G29

Suggested Citation

Cao, Ying and Myers, Linda A. and Sougiannis, Theodore, Does Earnings Acceleration Convey Information? (April 2011). Review of Accounting Studies, Vol. 16, No. 4, 2011. Available at SSRN: https://ssrn.com/abstract=1120494

Ying Cao

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Theodore Sougiannis (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

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