The Rising Importance of Aggregate Earnings for Asset Prices

54 Pages Posted: 8 Apr 2022 Last revised: 13 Sep 2022

See all articles by Gil Sadka

Gil Sadka

University of Texas at Dallas

Ronnie Sadka

Boston College - Carroll School of Management

Ayung Tseng

UC Davis, Graduate School of Management

Date Written: September 12, 2022

Abstract

This paper re-examines the earnings-returns relation in a framework that unifies the cross section and time series. While prior studies argue that earnings become less important for asset prices, they rely on cross-sectional analyses while ignoring time-series considerations. In contrast, time-series analyses indicate that the firm-level earnings-returns relation has not declined. When including both firm and aggregate earnings in a rolling-window panel setting, firm earnings exhibit a declining coefficient whereas aggregate earnings exhibit an increasing trend (switching from negative to positive). These trends are explained by an increase in firm connectedness and a decline in the predictability of aggregate earnings.

Keywords: firm-specific earnings, market-wide aggregate earnings, firm stock returns, earnings response coefficient, production network, input-output, earnings timeliness predictability

JEL Classification: D57, G14, L14, L25, M41

Suggested Citation

Sadka, Gil and Sadka, Ronnie and Tseng, Ayung, The Rising Importance of Aggregate Earnings for Asset Prices (September 12, 2022). Georgetown McDonough School of Business Research Paper No. 4068891, Available at SSRN: https://ssrn.com/abstract=4068891 or http://dx.doi.org/10.2139/ssrn.4068891

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Ayung Tseng (Contact Author)

UC Davis, Graduate School of Management ( email )

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