The declining association between earnings and returns

Steve C. Lim and Taewoo Park

Management Research Review, 2011, vol. 34, issue 8, 947-960

Abstract: Purpose - This paper aims to identify what drives the temporal reduction in the value relevance of earnings documented in the literature. Is it the increasing noise in stock returns over time, noise in earnings, or both? Design/methodology/approach - The authors develop hypotheses from the lead/lag structure between stock returns and accounting earnings and perform empirical tests using data from annual COMPUSTAT and monthly CRSP over the sample period of 39 years (1970‐2008). Findings - The test results show that increasing noise in stock returns over time is primarily responsible for the temporal reduction ofR2in regressions of returns on earnings. Additional analysis shows weak evidence that both the noise in returns and the noise in earnings are responsible for the declining association between earnings and returns in a sub‐period (1970‐1982). Research limitations/implications - TheR2‐based methodology has limitations because, as Gu points out, regressionR2s might be incomparable across samples. The findings suggest that future research should control for the effects of the temporal increase in market noise before making value relevance inferences from the declining association between earnings and returns. Originality/value - The paper contributes to the limited body of research on noise in stock returns as the main driver for the temporal reduction in value relevance of earnings.

Keywords: Value relevance; Noise in returns; Noise in earnings; Stock returns; Accounting research (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

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:eme:mrrpps:v:34:y:2011:i:8:p:947-960

DOI: 10.1108/01409171111152538

Access Statistics for this article

Management Research Review is currently edited by Dr Jay Janney and Prof Lerong He

More articles in Management Research Review from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().