Note on Booth et al., 'Earnings and stock returns: evidence from Germany'

H. P. Moller

European Accounting Review, 1999, vol. 8, issue 3, 549-563

Abstract: In an article published in this journal, Booth et al. (BBL) reach the conclusion that 'DVFA earnings provide information in addition to that provided by earnings calculated under the auspices of German GAAP' (BBL, p.599). Their 'results suggest that the effort spent to develop the method by which DVFA earnings are calculated has been well spent, since it enables market participants to price German stocks more fairly' (BBL, p.600). Although BBL do not distinguish in their model explicitly between reported earnings and DVFA earnings, the reader could get the impression that earnings can explain a great deal of the return variance and that so-called DVFA earnings (in contrast to reported earnings) play the most informative role in the explanation of German stock returns, both of them yielding an R2 of 0.506. In my opinion, there are some weaknesses in the argumentation, because (1) BBL de-emphasize the problems inherent in the subjectivity of the external determination of DVFA earnings; (2) BBL use a model for evaluating the value relevance of DVFA data that might conflict with the requirements of DVFA data for a valuation model; (3) the model finally used by BBL for the analysis of the value relevance of earnings numbers seems to be inadequate to describe reality; and (4) the process of data selection applied by BBL might also have caused the results. These arguments are explained in more detail in the remainder of this note.

Date: 1999
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DOI: 10.1080/096381899335934

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