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
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: Suggested Citation