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

See all articles by Teppo Martikainen

Teppo Martikainen

University of Vaasa

Juha-Pekka Kallunki

University of Oulu - Department of Economics, Accounting and Finance

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

Martikainen, Teppo and Kallunki, Juha-Pekka, 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, Available at SSRN: https://ssrn.com/abstract=37840

Teppo Martikainen (Contact Author)

University of Vaasa ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland
+358 6 3248 268 (Phone)
+358 6 3248 344 (Fax)

Juha-Pekka Kallunki

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland
+358 8 553 2956 (Phone)
+358 8 553 2906 (Fax)

HOME PAGE: http://www.cc.oulu.fi/~jpkallun

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