Why is the Value Relevance of Earnings Lower for High-Tech Firms?

B. Brian Lee, Eric Press and B. Ben Choi
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B. Brian Lee: Prairie View A&M University, USA
Eric Press: Temple University Philadelphia, USA
B. Ben Choi: Victoria, Canada

Chapter 4 in Advances in Quantitative Analysis of Finance and Accounting, 2008, pp 49-82 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis chapter examines the value relevance of earnings in high- and low-technology industries, a topic about which unresolved questions remain. The focus is on high-tech firms, given assertions that financial reporting is least effective for their industries. It is found that adjusting for expense mismatching is more effective in low-tech industries, while diversifying noise in high-tech industries substantially increases the association of earnings and stock returns. The value relevance of earnings for either type is indistinguishable when noise and expense mismatching are jointly controlled. It is thus concluded that noise arising from uncertainty of realizing future R&D benefits is the main factor explaining the weaker association of earnings and stock returns for high-tech firms.

Keywords: Hedging Strategies; Expense Mismatching; Stock Split; Trading Volume; Portfolio Optimization; Intraday Patterns; Earnings Management; International Winner-Loser Effect (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2008
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