Balance Sheet Information and Future Stock Returns

17 Pages Posted: 23 Jul 2006

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

A. Irem Tuna

London Business School

Date Written: May 2006

Abstract

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

Richardson, Scott Anthony and Sloan, Richard G. and Tuna, Ayse Irem, Balance Sheet Information and Future Stock Returns (May 2006). Available at SSRN: https://ssrn.com/abstract=918135 or http://dx.doi.org/10.2139/ssrn.918135

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Richard G. Sloan

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

Los Angeles, CA 90089-0441
United States

Ayse Irem Tuna

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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