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Incremental information content of earnings†and nonearnings†based financial ratios

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  • WILLIAM S. HOPWOOD
  • THOMAS F. SCHAEFER

Abstract

. Given the quantity of nonearnings data disclosed in firms' annual reports, and the many dimensions of performance measured, it is likely that such information is used in establishing equilibrium prices in the market for firms' shares. This study empirically tests the hypothesis that equity price†relevant information conveyed by annual reports includes several measures other than earnings. The marginal impact of both earnings†and nonearnings†based financial ratios is analyzed and reported. The ratio information is first partitioned into distinct sets using an a priori linear components (LISREL) model. Association tests then show incremental information effects for the earnings†based ratio set as well as for several nonearnings†based ratio sets. Résumé. Étant donné la quantité de données étrangères aux bénéfices présentées dans les rapports annuels des entreprises et les nombreuses dimensions sous lesquelles le rendement est mesuré, il est probable que cette information soit utilisée dans l'établissement de prix d'équilibre dans le marché des actions des entreprises. Dans la présente étude, les auteurs procèdent à des vérifications empiriques de l'hypothèse selon laquelle l'information pertinente aux prix relative aux participations que livrent les rapports annuels comporte plusieurs mesures étrangères aux bénéfices. Les auteurs analysent l'incidence marginale tant des ratios financiers basés sur les bénéfices que de ceux qui ne le sont pas, et ils en exposent les résultats. L'information indiciaire est d'abord partagée en jeux distincts à l'aide d'un modèle de composants linéaires a priori. Les tests d'association montrent ensuite les conséquences de l'information marginale pour le jeu des ratios basés sur les bénéfices ainsi que pour plusieurs jeux de ratios qui ne le sont pas.

Suggested Citation

  • William S. Hopwood & Thomas F. Schaefer, 1988. "Incremental information content of earnings†and nonearnings†based financial ratios," Contemporary Accounting Research, John Wiley & Sons, vol. 5(1), pages 318-342, September.
    • Handle: RePEc:wly:coacre:v:5:y:1988:i:1:p:318-342
    DOI: 10.1111/j.1911-3846.1988.tb00708.x
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    References listed on IDEAS

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