An Analysis of Stock Returns and Aggregate Earnings

42 Pages Posted: 15 Mar 2012

See all articles by Yunhao Chen

Yunhao Chen

Florida International University (FIU) - School of Accounting

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance

Bong‐Soo Lee

Florida State University

Date Written: March 14, 2012

Abstract

We reexamine the time-series properties and determinants of the relation between aggregate earnings and returns (earnings response coefficient, ERC) employing return decompositions with longer historical data. We find that aggregate ERC is time-varying, above and beyond the evidence documented in prior literature that aggregate ERC is negative. We also find the aggregate ERC components - expected return ERC, cash flow news ERC, and discount rate news ERC - are time-varying. We reconcile the prior findings and show that both news and expectations of returns contribute to aggregate ERC and the relative importance of each varies over time. We further show that the time-varying aggregate ERC and the relative importance of aggregate ERC components are strongly associated with macroeconomic conditions and the stock market regulation environment.

Keywords: earnings response coefficient, stock returns, aggregate earnings, discount rates, cash flows, expected returns

JEL Classification: E32, G12, G14, M41

Suggested Citation

Chen, Yunhao and Jiang, Xiaoquan and Lee, Bong Soo, An Analysis of Stock Returns and Aggregate Earnings (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=2022720 or http://dx.doi.org/10.2139/ssrn.2022720

Yunhao Chen

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Xiaoquan Jiang (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Bong Soo Lee

Florida State University ( email )

Tallahasse, FL 32306
United States

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