Earnings Beta

Review of Accounting Studies, 2021, 26 (1), 81-122

49 Pages Posted: 8 Jun 2020 Last revised: 29 Apr 2021

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2020

Abstract

The literature on ‘cash flow’ or ‘earnings’ beta is theoretically well-motivated in its use of fundamentals, instead of returns, to measure systematic risk. However, empirical measures of earnings beta based on either log-linearizing the return equation or log-linearizing the clean-surplus accounting identity are often difficult to construct. I construct simple earnings betas based on various measures of realized and expected earnings, and find that an earnings beta based on price-scaled expectations shocks performs consistently well in explaining the cross-section of returns over 1981–2017. I also examine the relation between different measures of beta and several firm characteristics that are either theoretically connected to systematic risk or are empirically associated with returns, and find evidence in support of the construct validity of an earnings beta based on price-scaled expectations shocks. Overall, the findings suggest that this easy-to-construct earnings beta can be suitable for future researchers requiring a measure of systematic risk.

Keywords: cash flow beta, earnings beta, systematic risk, expected returns, aggregate earnings

JEL Classification: G10, G12, M41

Suggested Citation

Ellahie, Atif, Earnings Beta (July 1, 2020). Review of Accounting Studies, 2021, 26 (1), 81-122, Available at SSRN: https://ssrn.com/abstract=3614722 or http://dx.doi.org/10.2139/ssrn.3614722

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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