Forev3rNAlway5
INTP / UvA / Accountancy
SJH.MOE
FAR Notes

Week 1 Lecture

Testing the usefulness of accounting and financial reporting

Whether accounting information is useful.

Paper 01 Nichols and Wahlen, (2004)

How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence

Earnings –> Stock returns

Earnings == Net income

Stock returns == Relative change in stock price (DIV + ΔPrice)

Ball and Brown, (1968)

Evaluation role: Whether accounting information reflects the value the company created for the shareholders?

Research question: Do earnings capture information that investors consider useful and “value relevant” for decision making?

At that time, accounting information was considered useless.

  1. Changes in earnings are related with stock returns.
  2. Accounting earnings information is not particularly timely.
  3. Investors react rapidly to new information in earnings, their reaction is not complete. Post-earnings announcement drift (PEAD)

The framework

Current earnings –> Future periods’ earnings –> Future dividends –> Share value (Discounted future dividends)

https://sjh.moe/wp-content/uploads/2019/11/image-1.png
Three Links
  • Link 1: Forward-looking information
  • Link 2: Practically and academically valid (Even if firms do not pay dividends)
  • Link 3: Valuation
https://sjh.moe/wp-content/uploads/2019/11/image.png

The value of an equity share can be seen as the present value of expected future dividends.

Earnings persistence

The likelihood a firm’s earnings level will recur in future periods. (Link 1)

Transitory (One-time) event (Gain/Loss) –> No effect on future dividends –> Little impact on stock value

Results (Monthly data)

https://sjh.moe/wp-content/uploads/2019/11/image-8-1024x527.png
https://sjh.moe/wp-content/uploads/2019/11/image-5-1024x458.png
https://sjh.moe/wp-content/uploads/2019/11/image-6-1024x784.png

Results (Daily data)

https://sjh.moe/wp-content/uploads/2019/11/image-7-1024x625.png
https://sjh.moe/wp-content/uploads/2019/11/image-9-1024x540.png

Summaries

If market is fully efficient, the stock price should automatically reflect information immediately. In other words, the direction of stock price cannot be predicted after the announcement.

HOWEVER

In reality, the stock price still drifts upwards or downwards after the announcement of earnings (Good news or bad news).

SO

The market is not totally efficient.

Regression

Earnings Response Coefficient (ERC)

Every 1 euro of earning surprise leads to ERC euro increase in stock price.

The impact of current earnings change to future earnings (persistence)

R-squared

R-squared (𝑅2) provides information on the proportion of the total variation in dependent variable Y that is explained by the independent variable(s) X in the model

See more knowledge about regression here, including standard error, t-value, etc.

赞赏
本文链接:https://sjh.moe/msc-far
本文采用 CC BY-NC-SA 4.0 协议进行许可
没有标签
首页      FAR Notes
https://secure.gravatar.com/avatar/ebfc8199665f9507bc7a4882cd305854?s=256&d=mm&r=g

Forev3rNAlway5

文章作者

发表评论

textsms
account_circle
email

  • https://secure.gravatar.com/avatar/?s=80&d=mm&r=g
    匿名

    👍

    2周前回复
  • https://secure.gravatar.com/avatar/ebfc8199665f9507bc7a4882cd305854?s=80&d=mm&r=g
    Forev3rNAlway5博主

    众所周知,网站管理员是可以删评论的。@某某

    2周前回复
  • https://secure.gravatar.com/avatar/ebfc8199665f9507bc7a4882cd305854?s=80&d=mm&r=g
    Forev3rNAlway5博主

    另外众所周知,网站所有者是可以查 access log 的😳

    2周前回复

SJH.MOE

FAR Notes
Week 1 Lecture Testing the usefulness of accounting and financial reporting Whether accounting information is useful. Paper 01 Nichols and Wahlen, (2004) How Do …
扫描二维码继续阅读
2019-11-07