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Does earnings acceleration convey information?

Author

Listed:
  • Ying Cao

    (The Chinese University of Hong Kong)

  • Linda A. Myers

    (University of Arkansas)

  • Theodore Sougiannis

    (University of Illinois and ALBA)

Abstract

Valuation theory, investment managers, financial analysts, and textbooks advocating horizontal financial statement analysis suggest that the change in earnings growth (earnings acceleration) conveys value relevant information. We test this assertion using a large sample of U.S. firms. Results from cross-sectional short-window (around earnings announcements) and long-window (annual) returns-earnings regressions reveal a strong association between contemporaneous returns and earnings acceleration after controlling for earnings levels and changes. Moreover, earnings acceleration is useful in predicting future earnings, and financial analysts appear to use the information in earnings acceleration in addition to earnings levels and changes in revising their forecasts. Furthermore, earnings acceleration conveys information incremental to that provided by changes in analysts’ forecasts of long-term earnings growth. This study extends the empirical returns-earnings model that includes only earnings levels and changes and shows that more useful information can be extracted from reported earnings numbers than has been previously documented.

Suggested Citation

  • Ying Cao & Linda A. Myers & Theodore Sougiannis, 2011. "Does earnings acceleration convey information?," Review of Accounting Studies, Springer, vol. 16(4), pages 812-842, December.
    • Handle: RePEc:spr:reaccs:v:16:y:2011:i:4:d:10.1007_s11142-011-9150-y
    DOI: 10.1007/s11142-011-9150-y
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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