The power of firm fundamental information in explaining stock returns

60 Pages Posted: 21 Dec 2017 Last revised: 21 Jul 2020

See all articles by Shuai Shao

Shuai Shao

Zhejiang University

Robert C. Stoumbos

Columbia University - Columbia Business School

Frank Zhang

Yale School of Management

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Date Written: July 13, 2018


Prior literature shows that earnings have come to explain less stock price movement over time, suggesting that firm fundamental information has become less important. In this paper, we replace earnings with earnings announcement returns as a measure of firm fundamental news and find that these firm fundamentals have come to explain more price movement over time. In the years after 2003, earnings announcement returns explain roughly 20% of the annual return—almost twice as much as they did before, indicating that fundamental information has become more important, not less, in explaining stock returns. This pattern occurs for other forms of firm fundamental information. Collectively, the returns around earnings announcements, management guidance, analyst forecasts, analyst recommendations, and 8-K filings went from explaining 17% of annual returns on average in the late 1990s to 39% on average in the early 2010s. In exploring possible explanations for the increase in the explanatory power of fundamental information, we find evidence consistent with regulatory changes, such as new 8-K filing requirements and Sarbanes-Oxley, collectively making disclosures more informative.

Keywords: earnings, cash flows, firm fundamentals, stock returns

JEL Classification: M40, M41, G12, G14

Suggested Citation

Shao, Shuai and Stoumbos, Robert C. and Zhang, Frank, The power of firm fundamental information in explaining stock returns (July 13, 2018). Columbia Business School Research Paper No. 18-7, Available at SSRN: or

Shuai Shao

Zhejiang University ( email )

Zijingang Campus
School of Management
Hangzhou, Zhejiang 310058

Robert C. Stoumbos

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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