Stock Price Predictions with Accounting Information

Posted: 14 Jul 1997

See all articles by Susan Riffe

Susan Riffe

Southern Methodist University (SMU) - Accounting Department

Rex Thompson

affiliation not provided to SSRN

Date Written: March 1997

Abstract

FOR PAPER OR ELECTRONIC COPIES CONTACT: Pam Reinhart, 430 Fincher, Cox School of Business, Southern Methodist University, Dallas, TX 75275. Phone: (214) 768-3275. E-mail: MAILTO:preinhar@mail.cox.smu.edu In this paper, we discuss a framework for approaching the problem of how best to estimate stock price given a set of accounting information. We apply the theory of inverse probability to formulate price predictions based on an estimate of the mean of the posterior distribution for price, given the information that the accounting process provides. The implications of incorporating into our framework alternative assumptions about accounting measurement error and the unconditional price distribution are discussed. An empirical methodology and statistical tests for evaluating prediction performance are also described. Finally, we present a limited set of empirical results that shed light on the functional form of a pricing model based on accounting earnings and book value. The form of our most refined model is consistent with recent empirical evidence that has identified convexity in the relationship between price and accounting information.

JEL Classification: M41, G12

Suggested Citation

Riffe, Susan and Thompson, Rex W., Stock Price Predictions with Accounting Information (March 1997). Available at SSRN: https://ssrn.com/abstract=8537

Susan Riffe (Contact Author)

Southern Methodist University (SMU) - Accounting Department

United States

Rex W. Thompson

affiliation not provided to SSRN

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