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What kind of earnings shape more market expectations?
Date de parution
2018
Résumé
We study how earnings attributes affect investors expectations about future earnings reflected in market prices. We separate the contribution of current earnings to price setting through a valuation incorporating expectations informed only by the current value of earnings. Its pricing error measures the extent to which expectations are shaped by information other than current earnings. We estimate the association between this pricing error and eleven earnings quality constructs commonly used in the empirical literature using a large sample of US non-financial firms over the period 1971-2016. We find that, above all, quality earnings vary little (are sustainable) and are predictive of future earnings. Moreover, their low volatility is shared by their accrual component and is not due to aggressive smoothing. We document that time-series accrual quality proxies subsume measures based on popular residual accruals models in shaping expectations. How often firms report special items has a significant impact on current earnings relevance to expectation formation: the less often, the better.
Identifiants
Type de publication
working paper
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