Determinants of the Returns-Earnings Correlation

Posted: 15 Sep 1995

See all articles by Pervin K. Shroff

Pervin K. Shroff

University of Minnesota - Twin Cities - Carlson School of Management

Abstract

The weak correlation between accounting earnings and security returns documented by numerous empirical studies is an issue of concern in current accounting research. Given that price is determined not solely by accounting earnings but also by other sources of information about future earnings this paper focuses on the relation between earnings and other information to understand the returns- earnings association. The analysis indicates that current earnings exhibit high explanatory power for returns if they correlate with expected future earnings (or with other information which reflects expected future earnings). A high price-earnings (P/E) ratio coupled with a high return on equity (ROE) can ex ante indicate earnings growth and the earnings of firms with these attributes are positively correlated with future earnings. The high growth subset obtains an impressive returns-earnings R2 of 31 percent and an earnings coefficient of 6.17 demonstrating that it is possible to identify firms whose earnings are strongly correlated with returns using a parsimonious set of firm characteristics.

JEL Classification: M41

Suggested Citation

Shroff, Pervin K., Determinants of the Returns-Earnings Correlation. Contemporary Accounting Research, Vol 12, No 1, Fall 1995. Available at SSRN: https://ssrn.com/abstract=55461

Pervin K. Shroff (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-626-1570 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,730
PlumX Metrics