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Market Efficiency, Role of Earnings Information, and Stock Returns: A Vector Autoregressive Model Approach


  • Keiichi Kubota

    (Graduate School of Strategic Management, Chuo University, Japan)

  • Hitoshi Takehara

    (Graduate School of Finance, Accounting and Law, Waseda University, Japan)


This paper investigates how the information content contained in components of earnings is impounded into stock prices and provides new evidence on market efficiency for firms listed on the Tokyo Stock Exchange First and Second Sections. First, we conduct a conventional pooled Mishkin test to examine whether stocks are rationally priced or not, and claim how this particular test can result in misleading observations if we erroneously pool the data for the overall sample period by completely disregarding the time-series properties of accounting numbers. Next, we conduct time-series analyses on properties of the components of accounting earnings and cast doubt on the forecasting equation used in conventional Mishkin tests. In order to fully investigate the degrees of market efficiency and examine interrelationships between components of accounting earnings, we employ a vector autoregressive approach and propose a new framework to test rational pricing of the accounting information. We find that for 82% of firms listed on the Tokyo Stock Exchange the hypothesis of rational pricing cannot be rejected. This result implies that pooled estimation of the forecasting equation, which disregards the interacting structure among relevant variables, may lead us to incorrect inferences about the degree of informational efficiency in capital markets. The paper further confirms the robustness of our estimation results with some simulations studies.

Suggested Citation

  • Keiichi Kubota & Hitoshi Takehara, 2011. "Market Efficiency, Role of Earnings Information, and Stock Returns: A Vector Autoregressive Model Approach," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 1, pages 17-37, December.
  • Handle: RePEc:kob:tjrevi:dec2011:v:1:p:17-37

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    More about this item


    Accounting Accruals; Rational Expectations; Mishkin Test; Augmented Dickey-Fuller Test; Impulse Response Functions;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection


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