Lack of Timeliness and Noise as Explanations for the Low Contemporaneous Return-Earnings Association

Rochester Working Paper No. FR 94-03

Posted: 25 Apr 1998

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jay A. Shanken

Emory University - Goizueta Business School; National Bureau of Economic Research (NBER)

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Abstract

We assess earnings lack of timeliness and value- irrelevant noise in earnings as explanations for the weak contemporaneous return-earnings association. Earnings lack timeliness because objectivity, verifiability, and conservatism conventions underlie the accounting measurement process. Noise in earnings is uncorrelated with returns in all periods. It likely gets introduced when estimates of future cash flows that differ from the markets estimates are included in earnings determined by accounting rules. Consistent with earnings lacking timeliness, we find current and future return earnings adjusted for expectational errors explain roughly 3-6 times as much of the annual return variation than current earnings alone.

JEL Classification: G30

Suggested Citation

Collins, Daniel W. and Kothari, S.P. and Shanken, Jay A. and Sloan, Richard G., Lack of Timeliness and Noise as Explanations for the Low Contemporaneous Return-Earnings Association. Rochester Working Paper No. FR 94-03. Available at SSRN: https://ssrn.com/abstract=6210

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Jay A. Shanken

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4772 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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