Bridging the gap between stock price and bottom-line accounting numbers

Zihang Peng (), Pengguo Wang () and Demetris Christodoulou
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Zihang Peng: University of New South Wales
Pengguo Wang: University of Exeter

Review of Accounting Studies, 2024, vol. 29, issue 1, No 20, 735 pages

Abstract: Abstract We develop a method for extracting “other information” from the articulation between bottom-line accounting numbers and stock prices. We posit that “other information” captures future earnings growth originating from conservative accounting recognition principles as demonstrated by Penman and Zhang (2020) and Penman and Zhu (2022), as well as nonzero net present value investment opportunities. Our findings confirm that “other information” is strongly associated with various proxies for expected future earnings growth and firm risk attributes. Furthermore, we show how a structural expected return model incorporating our “other information” estimate can predict out-of-sample future stock returns and generate sizeable long-short return spreads.

Keywords: Conservatism; Earnings growth; Equity valuation; Risk; Other information; G11; M41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-022-09722-z

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