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Autoregressive Modeling of Earnings-Investment Causality

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  • Bar Yosef, Sasson
  • Callen, Jeffrey L
  • Livnat, Joshua

Abstract

The purpose of this paper is to empirically test the relationships between corporate earnings and investment. In particular, the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone. Similarly, it investigates whether knowledge of past earnings improve the prediction of future investments beyond knowledge of past investments alone. This is the empirical definition of Granger causality. The empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investment, but not in predicting future earnings. Copyright 1987 by American Finance Association.

Suggested Citation

  • Bar Yosef, Sasson & Callen, Jeffrey L & Livnat, Joshua, 1987. "Autoregressive Modeling of Earnings-Investment Causality," Journal of Finance, American Finance Association, vol. 42(1), pages 11-28, March.
    • Handle: RePEc:bla:jfinan:v:42:y:1987:i:1:p:11-28
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    Cited by:

    1. Agiakloglou, Christos & Gkouvakis, Michail, 2015. "Causal interrelations among market fundamentals: Evidence from the European Telecommunications sector," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 150-159.
    2. Callen, Jeffrey L., 2015. "A selective critical review of financial accounting research," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 26(C), pages 157-167.
    3. Sungsoo Kim & Amitav Saha & Sudipta Bose, 2021. "Do capital expenditures influence earnings performance: Evidence from loss‐making firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2539-2575, April.
    4. Ghosh, Suvankar & Troutt, Marvin D. & Thornton, John H. & Felix Offodile, O., 2010. "An empirical method for assessing the research relevance gap," European Journal of Operational Research, Elsevier, vol. 201(3), pages 942-948, March.
    5. DiMaria, charles-henri, 2023. "Profitability, investment and capital productivity," MPRA Paper 118640, University Library of Munich, Germany.
    6. Igor Stubelj, 2014. "Investment and Profits: Causality Analysis in Selected EU Countries," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 12(4 (Winter), pages 395-413.
    7. Trofimov, Ivan D., 2022. "Determinants of the profit rates in the OECD economies: A panel data analysis of the Kalecki's profit equation," Structural Change and Economic Dynamics, Elsevier, vol. 61(C), pages 380-397.
    8. Emeka T. Nwaeze & Simon S. M. Yang & Q. Jennifer Yin, 2006. "Accounting Information and CEO Compensation: The Role of Cash Flow from Operations in the Presence of Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 227-265, March.

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