Accounting Losses and Earnings Response Coefficients: The Impact of Leverage and Growth Opportunities

Minna Martikainen

Journal of Business Finance & Accounting, 1997, vol. 24, issue 2, 277-292

Abstract: This paper investigates how accounting losses affect the relationship between accounting earnings and stock returns, i.e. earnings response coefficients (ERCs), in different leverage and growth categories. In a sample of NYSE firms between 1975 and 1990, the exclusion of losses improves the ERCs considerably. While the impact of losses on ERCs is highest in the subgroup including high growth opportunity firms, the exclusion of losses does not improve ERCs as significantly among firms with low growth opportunities. The results further support the hypothesis that the impact of losses on ERCs is different in different financial leverage subgroups. The measured increase in ERCs is most significant among the least levered firms. The observation that the impact of losses on ERCs is related to growth opportunities and financial leverage is clearly observable also in different size categories. The effects of growth opportunities and financial leverage are also incrementally important with respect to each other. In general, the results indicate that the impact of growth opportunities and financial leverage on ERCs is clearly observable especially when losses and profits are analyzed separately.

Date: 1997
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