Demand for Stocks and Accounting Information

52 Pages Posted: 2 Feb 2022 Last revised: 3 May 2023

See all articles by Charles McClure

Charles McClure

University of Chicago Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: May 1, 2023

Abstract

We use equity portfolio allocation decisions to study the relevance of accounting information for investors’ demand for stocks. Investors’ revealed preferences indicate that operating profit dominates gross profit and net income in explaining the aggregate demand for stocks. Further, accrual-based profitability measures dominate and largely subsume cash-based measures. However, these conclusions do not hold for investor-specific demands. We document significant heterogeneity across investors in the demand relevance of profitability measures. We predict and find that the relevance of accounting information varies as a function of investors’ objectives. Furthermore, our findings reveal that individual investors’ demands have an important effect on the equilibrium relation between stock prices and accounting profits.

Keywords: Demand relevance, portfolio decisions, accruals, earnings, demand for stocks, investor heterogeneity

JEL Classification: G10, G18, M40, M41, M44, M45

Suggested Citation

McClure, Charles and Nikolaev, Valeri V., Demand for Stocks and Accounting Information (May 1, 2023). Chicago Booth Research Paper No. 22-06, Available at SSRN: https://ssrn.com/abstract=4023542 or http://dx.doi.org/10.2139/ssrn.4023542

Charles McClure (Contact Author)

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Valeri V. Nikolaev

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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