Predictability and the earnings-returns relation

Gil Sadka and Ronnie Sadka

Journal of Financial Economics, 2009, vol. 94, issue 1, 87-106

Abstract: This paper studies the effects of predictability on the earnings-returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings-returns relation is negative at the aggregate level but positive at the firm level.

Keywords: Stock; prices; Aggregate; earnings; Discount; rates; Expected; returns; Expected; earnings (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-405X(09)00106-8
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:94:y:2009:i:1:p:87-106

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().