Predictability and the Earnings-Returns Relation

Posted: 26 Nov 2008

See all articles by Gil Sadka

Gil Sadka

University of Texas at Dallas

Ronnie Sadka

Boston College - Carroll School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: November, 25 2008

Abstract

This paper studies the effects of predictability on the earnings-returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings-returns relation is negative at the aggregate level but positive at the firm level.

Keywords: Valuation, profitability, predictability, asset pricing

JEL Classification: E32, G12, G14, M41

Suggested Citation

Sadka, Gil and Sadka, Ronnie, Predictability and the Earnings-Returns Relation (November, 25 2008). Journal of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1307089

Gil Sadka (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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