Cross‐sectional Variation in Price Anticipation of Earnings

Raymond Donnelly

Journal of Business Finance & Accounting, 1998, vol. 25, issue 5‐6, 659-682

Abstract: Estimates of the earnings response coefficient (ERC) can be improved by including leading returns in return‐earnings models. This improvement in estimated ERC can be used to measure price anticipation of earnings. It is posited that this price anticipation is related to the information environment of a firm. Theories and prior empirical research pertaining to the information environment (e.g. Bhushan, 1989; Frankel et al., 1994) are used to identify three variables, breadth of trading, capital issues and volatility of returns, which potentially determine the extent of price anticipation of earnings. The empirical tests suggest that the tendency of prices to lead earnings is negatively related to thin trading and is positively related to the propensity for external financing and return volatility in the year immediately prior to that to which the anticipated earnings pertain.

Date: 1998
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