Earnings News, Expected Earnings and Aggregate Stock Returns

49 Pages Posted: 21 Dec 2011 Last revised: 3 May 2013

Jung Ho Choi

University of Chicago, Booth School of Business, Students

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation

Gil Sadka

University of Texas at Dallas

Date Written: May 1, 2013

Abstract

The relation between aggregate earnings and aggregate returns is complex and not fully understood. For example, in contrast to firm-level relations, prior literature finds aggregate earnings changes and aggregate stock returns are negatively related. This paper constructs new measures of aggregate earnings news based on revisions in analyst forecasts. The results show that aggregate earnings news is positively related to contemporaneous stock returns. The results also show that aggregate stock returns are positively related to unexpected aggregate forecast errors, and negatively associated with expected aggregate earnings growth. Taken together, these findings suggest that expected earnings are negatively related to expected returns and unexpected earnings surprises are positively related to changes in expected cash flows.

Keywords: Stock prices, Aggregate earnings, Discount rates, Expected returns, Expected Earnings

JEL Classification: E32, G12, G14, M41

Suggested Citation

Choi, Jung Ho and Kalay, Alon and Sadka, Gil, Earnings News, Expected Earnings and Aggregate Stock Returns (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=1975111 or http://dx.doi.org/10.2139/ssrn.1975111

Jung Ho Choi

University of Chicago, Booth School of Business, Students ( email )

Chicago, IL
United States

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Gil Sadka (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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