The Influence of the Nature of an Enterprise's Activities on Earnings Per Share and Cash Flow Per Share as Determinants of Share Prices

N J le Roux, W D Hamman, J U de Villiers and C Joubert

Studies in Economics and Econometrics, 2005, vol. 29, issue 1, 61-82

Abstract: The relative merits of earnings per share (EPS) and cash flow per share (CPS) as determinants of share prices are considered in this paper. Demsetz's method is used for quantifying the role of EPS and CPS for both an upswing and a decline phase of the economic cycle. The nature of an enterprise's activities i.e. predominantly labour intensive or predominantly capital intensive is also taken into account. Year-on-year changes for contemporaneous periods, various lead periods and various lag periods in EPS are contrasted with similar changes in CPS in explaining year-on-year changes in share prices. It is shown that the relative merits of EPS and CPS are conditional on both the nature of an enterprise's activities and the economic cycle. Furthermore, it is shown that the Demsetz-statistics are useless without information regarding their variability but that the bootstrap method can be used for calculating such estimates.

Date: 2005
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DOI: 10.1080/10800379.2005.12106381

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