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Earnings dispersion and aggregate stock returns

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  • Jorgensen, Bjorn
  • Li, Jing
  • Sadka, Gil

Abstract

This paper studies the relation between aggregate stock returns and contemporaneous and future cross-sectional earnings dispersion. We hypothesize that increases in expected earnings dispersion signal increases in uncertainty and increases in unemployment, thereby causing expected returns to rise, which in turn causes prices to decline. We find a positive relation between aggregate stock returns and contemporaneous earnings dispersion because higher earnings dispersion is associated with higher expected returns. Consequently, we also find a negative relation between aggregate stock returns and future (one-year ahead) earnings dispersion, as investors anticipate higher future earnings dispersion and higher expected returns.

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  • Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
    • Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:1-20
    DOI: 10.1016/j.jacceco.2011.06.001
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    2. Nakano, Makoto & 中野, 誠 & Aoki, Yasuharu, 2016. "What Explains Widening Profitability Dispersion Around The World?," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 50(1), pages 23-46, October.
    3. Andrew Phiri, 2017. "The Unemployment-Stock Market Relationship in South Africa: Evidence from Symmetric and Asymmetric Cointegration Models," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 15(3 (Fall)), pages 231-254.
    4. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1117-1159, December.
    5. Hui Guo & Xiaowen Jiang, 2011. "Accruals and the Conditional Equity Premium," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 187-221, March.
    6. Birru, Justin & Young, Trevor, 2022. "Sentiment and uncertainty," Journal of Financial Economics, Elsevier, vol. 146(3), pages 1148-1169.
    7. Ray Ball & Gil Sadka & Ronnie Sadka, 2009. "Aggregate Earnings and Asset Prices," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1097-1133, December.
    8. Yi Tang & Cuili Qian & Guoli Chen & Rui Shen, 2015. "How CEO hubris affects corporate social (ir)responsibility," Strategic Management Journal, Wiley Blackwell, vol. 36(9), pages 1338-1357, September.
    9. Gkougkousi, Xanthi & John, Kose & Radhakrishnan, Suresh & Sadka, Gil & Saunders, Anthony, 2022. "Cross-sectional dispersion and bank performance," Journal of Banking & Finance, Elsevier, vol. 138(C).
    10. Binz, Oliver & Mayew, William J. & Nallareddy, Suresh, 2022. "Firms’ response to macroeconomic estimation errors," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    11. Alon Kalay & Suresh Nallareddy & Gil Sadka, 2018. "Uncertainty and Sectoral Shifts: The Interaction Between Firm-Level and Aggregate-Level Shocks, and Macroeconomic Activity," Management Science, INFORMS, vol. 64(1), pages 198-214, January.
    12. Hamid Reza Vakilifard & Forough Heirany, 2013. "A Comparative Evaluation of the Predictability of Fama-French Three-Factor Model and Chen Model in Explaining the Stock Returns of Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(3), pages 118-124, July.
    13. Ball, Ray & Sadka, Gil, 2015. "Aggregate earnings and why they matter," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 39-57.
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    More about this item

    Keywords

    Accounting valuation; Earnings dispersion; Expected-return variation; Profitability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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