Please use this identifier to cite or link to this item: http://hdl.handle.net/10071/20588
Author(s): Isidro, H.
Dias, J. G.
Date: 2017
Title: Earnings quality and the heterogeneous relation between earnings and stock returns
Volume: 49
Number: 4
Pages: 1143 - 1165
ISSN: 0924-865X
DOI (Digital Object Identifier): 10.1007/s11156-017-0619-z
Keywords: Return volatility
Accruals
Stock market
Markov-switching model
Financial crisis
Abstract: We adopt a heterogeneous regime switching method to examine the informativeness of accounting earnings for stock returns. We identify two distinct time-series regimes in terms of the relation between earnings and returns. In the low volatility regime (typical of bull markets), earnings are moderately informative for stock returns. But in high volatility market conditions (typical of financial crisis), earnings are strongly related to returns. Our evidence suggests that earnings are more informative to investors when uncertainty and risk is high which is consistent with the idea that during market downturns investors rely more on fundamental information about the firm. Next, we identify groups of firms that follow similar regime dynamics. We find that the importance of accounting earnings for returns in each of the market regimes varies across firms: certain firms spend more time in a regime where their earnings are highly relevant to returns, and other firms spend more time in a regime where earnings are moderately relevant to returns. We also show that firms with poorer accrual quality have a greater probability of belonging to the high volatility regime.
Peerreviewed: yes
Access type: Open Access
Appears in Collections:BRU-RI - Artigos em revistas científicas internacionais com arbitragem científica

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