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Permanent and Transitory Earnings, Accounting Recording Lag, and the Earnings Coefficient

Author

Listed:
  • Peter Easton

    (The Ohio State University
    University of Melbourne)

  • Pervin Shroff

    (University of Minnesota)

  • Gary Taylor

    (University of Alabama)

Abstract

In this paper, (1) wedefine precisely the terms permanent and transitory earnings;(2) we delineate the effects of the degree of permanence andof accounting recording lag on estimates of the slope coefficientfrom a returns-earnings regression and (3) we examine the relationbetween the estimates of the earnings coefficient and observablevariables that may indicate (i) the extent to which earningsare more or less permanent, and (ii) the extent to which valuerelevant events are recorded in accounting earnings in a timelyfashion. Our main point is that attributing differences in thereturns-earnings relation to one of these effects without controllingfor the other may lead to erroneous conclusions.

Suggested Citation

  • Peter Easton & Pervin Shroff & Gary Taylor, 2000. "Permanent and Transitory Earnings, Accounting Recording Lag, and the Earnings Coefficient," Review of Accounting Studies, Springer, vol. 5(4), pages 281-300, December.
    • Handle: RePEc:spr:reaccs:v:5:y:2000:i:4:d:10.1023_a:1026589405910
    DOI: 10.1023/A:1026589405910
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    References listed on IDEAS

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    1. Lev, B & Zarowin, P, 1999. "The boundaries of financial reporting and how to extend them," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37(2), pages 353-385.
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    3. Ely, K & Waymire, G, 1999. "Accounting standard-setting organizations and earnings relevance: Longitudinal evidence from NYSE common stocks, 1927-93," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37(2), pages 293-317.
    4. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
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    6. Francis, J & Schipper, K, 1999. "Have financial statements lost their relevance?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37(2), pages 319-352.
    7. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
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