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Valuation Implications of Investment Opportunities and Earnings Permanence


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


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

Suggested Citation

  • Jones, Jefferson P & Morton, Richard M & Schaefer, Thomas F, 2000. "Valuation Implications of Investment Opportunities and Earnings Permanence," Review of Quantitative Finance and Accounting, Springer, vol. 15(1), pages 21-35, July.
  • Handle: RePEc:kap:rqfnac:v:15:y:2000:i:1:p:21-35

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    Cited by:

    1. Heather Anderson & Howard Chan & Robert Faff & Yew Kee Ho, 2012. "Reported earnings and analyst forecasts as competing sources of information: A new approach," Australian Journal of Management, Australian School of Business, vol. 37(3), pages 333-359, December.
    2. Jason West, 2015. "Capital valuation and sustainability: a data programming approach," Review of Quantitative Finance and Accounting, Springer, vol. 45(3), pages 591-608, October.
    3. Ashok Robin & Qiang Wu, 2015. "Firm growth and the pricing of discretionary accruals," Review of Quantitative Finance and Accounting, Springer, vol. 45(3), pages 561-590, October.

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