Understanding the Variation in the Information Content of Earnings: A Return Decomposition Analysis

Fisher College of Business Working Paper No. 2015-03-01

Charles A. Dice Center Working Paper No. 2015-01

42 Pages Posted: 14 Jan 2015

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

Yinglei Zhang

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

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: January 12, 2015

Abstract

We use the Campbell (1991) return decomposition framework to reexamine the variation in the information content of earnings between profit firms and loss firms and over time. We show that current earnings surprises are more strongly correlated with the discount rate news component of returns for loss firms and in the recent period. This stronger correlation offsets the positive relation between current earnings surprises and the earnings news component of returns, causing the overall earnings-return relation to be weaker for loss firms and during the recent period. Consistent with these findings, we also find that discount rate news is a more important driver of the return variation of loss firms and in the recent period. Our results highlight the importance of time-varying discount rates for understanding the information content of earnings.

Keywords: Earnings, Information Content, Return Decomposition, Discount Rate News

JEL Classification: G12, G14, M41

Suggested Citation

Hou, Kewei and Zhang, Yinglei and Zhuang, Zili, Understanding the Variation in the Information Content of Earnings: A Return Decomposition Analysis (January 12, 2015). Fisher College of Business Working Paper No. 2015-03-01. Available at SSRN: https://ssrn.com/abstract=2548688 or http://dx.doi.org/10.2139/ssrn.2548688

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Yinglei Zhang

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

Shatin, N.T.
Hong Kong

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin N.T.
Hong Kong

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