The Relation between Earnings and Stock Returns in the Long Run: Replication and Extension

Muath B. Abdelqader, Mamoun M. Al-Debi’e, Fawzi A. Gharaibeh

Abstract


The study aims at examining the effect of expanding the measurement window of the relationship between accounting earnings and stock returns on the explanatory power of the model and the earnings response coefficient. Furthermore, it provides an interpretation of the value and behavior of the earnings response coefficient over various measurement windows. The study sample consists of sixty three public industrial and service companies over the period 1992-2004, with a number of observations ranging between 311, for a measurement window of twelve months, and 73 observations, for a measurement window of seventy two months. The results indicate that expanding the measurement window enhances the explanatory power of accounting earnings in regard to variations in stock market prices. Moreover, it has been noticed that the value of the earnings response coefficient increases as the covariance between accounting earnings and unrecorded goodwill increases. Finally, it has been noticed that, for a ten-year measurement window, the value of the earnings response coefficient approaches one as the value of the covariance approaches zero.

Keywords


Accounting earnings, Stock market returns, Earnings response coefficient, Length of measurement

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