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Valuation Implications of Investment Opportunities and Earnings Permanence

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  • Jones, Jefferson P
  • Morton, Richard M
  • Schaefer, Thomas F
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    Abstract

    This study investigates the value-relevance of accounting earnings in the presence of investment (growth) opportunities after making two theoretical and methodological research design refinements. First, we test for the incremental effect of growth on firms' earnings response coefficients after controlling for the extent of transitory earnings under the assumption that the value-relevance of earnings with respect to growth should be stronger when earnings are more permanent. Second, we perform comprehensive factor analysis using market-based and accounting-based measures to construct a composite proxy for investment opportunities. We find that firms' investment opportunities and the relative permanence of current earnings affect the value-relevance of those earnings. Additionally, we find that the interaction between permanent earnings and investment opportunities produces an even stronger price response to earnings. Copyright 2000 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 15 (2000)
    Issue (Month): 1 (July)
    Pages: 21-35

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    Handle: RePEc:kap:rqfnac:v:15:y:2000:i:1:p:21-35

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. H.M. Anderson & H. Chan & R. Faff & Y.K. Ho, 2007. "Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach," ANU Working Papers in Economics and Econometrics 2007-488, Australian National University, College of Business and Economics, School of Economics.

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