The Lead-Lag Structure of Stock Returns and Accounting Earnings: Implications to the Returns-Earnings Relation in Finland
International Review of Financial Analysis, Vol 6, No 1, 1997
Posted: 26 Oct 1997
Abstract
This paper provides new evidence on how the relationship in time between stock returns and accounting earnings affects the observed Finnish returns-earnings relation in two subperiods, the boom in 1988-1990 and the recession in 1991-1993. Similar to the earlier U.S. results, we find that stock returns lead accounting earnings rather than vice versa. When taking into account this lead-lag structure between stock returns and accounting earnings, we find that the estimated returns-earnings relation is significantly weaker in the recession period than in the boom period. After controlling for the different valuation impact of accounting losses and profits, the explanatory power of accounting earnings on stock prices is similar between the two periods. These findings are consistent with the hypothesis that investors perceive losses as temporary, being not reflected in future cash flows.
JEL Classification: G12, G14, M41
Suggested Citation: Suggested Citation