Balance Sheet Information and Future Stock Returns
17 Pages Posted: 23 Jul 2006
Date Written: May 2006
Numerous studies have documented that the most recent annual change in net operating assets is negatively related to future stock returns. In recent work, Hirshleifer, Hou, Teoh and Zhang (2004) show that the level of net operating assets scaled by the previous year's total assets is also negatively related to future returns. They argue that their levels variable is superior to the change variable used in prior research because it picks up cumulative past changes, rather than just the most recent annual change. We point out that deflation of a level by a lagged level produces a change. As such, their level variable is similar to the change variable used in prior research, and their claim that it picks up cumulative past changes in net operating assets is misleading.
Keywords: accounting information, balance sheet, market efficiency
JEL Classification: G14, M41, C13
Suggested Citation: Suggested Citation