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Predictability and the earnings-returns relation

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  • Sadka, Gil
  • Sadka, Ronnie
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    Abstract

    This paper studies the effects of predictability on the earnings-returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings-returns relation is negative at the aggregate level but positive at the firm level.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 94 (2009)
    Issue (Month): 1 (October)
    Pages: 87-106

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    Handle: RePEc:eee:jfinec:v:94:y:2009:i:1:p:87-106

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Stock prices Aggregate earnings Discount rates Expected returns Expected earnings;

    References

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    Cited by:
    1. J├Ąckel, Christoph, 2013. "Model uncertainty and expected return proxies," MPRA Paper 51978, University Library of Munich, Germany.
    2. Hyunbae Chun & Jung-Wook Kim & Randall Morck, 2013. "Productivity Growth and Stock Returns: Firm- and Aggregate-Level Analyses," NBER Working Papers 19462, National Bureau of Economic Research, Inc.
    3. Panos Patatoukas & Hongjun Yan, 2009. "The Impact of Earnings Surprises on Stock Returns: Theory and Evidence," Yale School of Management Working Papers amz2517, Yale School of Management.
    4. 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.

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