Price Models and Earnings Response Coefficients

Posted: 28 Aug 1995

See all articles by Norman C. Strong

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Zhongtao Harding

University of Manchester

Abstract

We extend the Kothari-Zimmerman (1993) study of price- earnings models to a more general accounting based valuation model. In this more general setting earnings response coefficients are not usually equal to the reciprocal of the firm's cost of equity capital. Moreover the price-earnings models considered by Kothari and Zimmerman (1993) can lead to upward biased estimates of the true earnings response coefficient. Using data for UK companies we first replicate the findings of Kothari and Zimmerman and then present new evidence that rejects the simple price earnings model in favour of the general model.

JEL Classification: M41, G14

Suggested Citation

Strong, Norman Charles and Walker, Martin and Harding, Zhongtao, Price Models and Earnings Response Coefficients. Available at SSRN: https://ssrn.com/abstract=55452

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Zhongtao Harding

University of Manchester

Oxford Road
Manchester M13 9PL, M13 9PL
United Kingdom

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