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Analysts Earnings Forecasts and the Roles of Earnings and Book Value in Equity Valuation

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  • Jane A. Ou
  • James F. Sepe

Abstract

This study examines the effect of the degree of association between current earnings and expected future earnings on the relative importance of earnings and book value for explaining equity price. Consensus analysts forecasts of one‐year‐ahead earnings are used to proxy for expected future earnings and are compared to reported current earnings to measure the degree of the association. We find that the value‐relevance of current earnings negatively correlates with the extent to which consensus analysts forecasts deviate from current earnings. We also find that the incremental explanatory power of book value for equity price positively correlates with this measure. These results remain robust after controlling for factors known to be affecting the value‐relevance of earnings such as negative earnings and the earnings‐to‐book ratio. Our results also show that this analysts' forecast‐based measure of `earnings persistence' dominates historical earnings variance in explaining cross‐sectional variations in the value‐relevance of earnings and book value.

Suggested Citation

  • Jane A. Ou & James F. Sepe, 2002. "Analysts Earnings Forecasts and the Roles of Earnings and Book Value in Equity Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(3‐4), pages 287-316, April.
    • Handle: RePEc:bla:jbfnac:v:29:y:2002:i:3-4:p:287-316
    DOI: 10.1111/1468-5957.00433
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    Cited by:

    1. Alain Durré & Pierre Giot, 2007. "An International Analysis of Earnings, Stock Prices and Bond Yields," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 613-641, April.
    2. Waqas Bin Khidmat & Man Wang & Sadia Awan, 2018. "Corporate governance, earnings management and the value-relevance of accounting information: Evidence from Pakistan," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-31, September.
    3. Han-Hsing Lee, 2020. "Distress risk, product market competition, and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1093-1135, October.
    4. Shu-Ling Hsu, 2017. "The Difference between Stock Prices before and after Implementation of International Financial Reporting Standards," Accounting and Finance Research, Sciedu Press, vol. 6(4), pages 285-285, Novebmer.
    5. Chen, Ching-Lung & Lu, Ming-Che & Yen, Gili, 2012. "Dilution/incentive effects associating with employee bonuses in Taiwan: Empirical findings under two regimes," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 267-283.
    6. Kee‐Hong Bae & Seok Woo Jeong, 2007. "The Value‐relevance of Earnings and Book Value, Ownership Structure, and Business Group Affiliation: Evidence From Korean Business Groups," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 740-766, June.
    7. Joseph P.H. Fan & Feng Guan & Zengquan Li & Yong George Yang, 2014. "Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 831-866, September.

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