The Information Content of Earnings and Prices: A Simultaneous Equations Approach

Posted: 4 Sep 1995

See all articles by William H. Beaver

William H. Beaver

Stanford University

Mary Lea McAnally

Texas A&M University - Department of Accounting

Christopher H. Stinson

University of Texas at Austin - Department of Accounting

Abstract

The price-earnings relation can be characterized as a system of simultaneous equations. Earnings may change for reasons that do not lead to price changes and vice versa. Hence each behaves as if it is "measured with error" for purposes of estimating the sensitivity coefficients. Equation-by- equation estimation is deficient because of underidentification and bias. Across a variety of specifications the coefficients increase dramatically in moving from OLS to 3SLS and provide less divergent estimates of the underlying parameters. The study documents that a substantial portion of the bias can be mitigated via joint estimation.

JEL Classification: M41, G14

Suggested Citation

Beaver, William H. and McAnally, Mary Lea and Stinson, Christopher H., The Information Content of Earnings and Prices: A Simultaneous Equations Approach. Available at SSRN: https://ssrn.com/abstract=55455

William H. Beaver (Contact Author)

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Mary Lea McAnally

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-5017 (Phone)
979-845-0014 (Fax)

Christopher H. Stinson

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,370
PlumX Metrics