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Does the Stock Market Fully Appreciate the Implications of Leading Indicators for Future Earnings? Evidence from Order Backlog

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Listed:
  • Shivaram Rajgopal

    (University of Washington)

  • Terry Shevlin

    (University of Washington)

  • Mohan Venkatachalam

    (Duke University)

Abstract

Although leading indicators are becoming increasingly important for equity valuation, disclosures of such indicators suffer from the absence of GAAP related guidance on content and presentation. We explicitly examine (i) whether one leading indicator—order backlog—predicts future earnings, and (ii) whether market participants correctly incorporate such predictive ability in determining share prices. We find that the stock market overweights the contribution of order backlog in predicting future earnings, and a hedge strategy that exploits such overweighting generates significant future abnormal returns. However, such mispricing is not due to analysts' inability to incorporate order backlog into their earnings forecasts.

Suggested Citation

  • Shivaram Rajgopal & Terry Shevlin & Mohan Venkatachalam, 2003. "Does the Stock Market Fully Appreciate the Implications of Leading Indicators for Future Earnings? Evidence from Order Backlog," Review of Accounting Studies, Springer, vol. 8(4), pages 461-492, December.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:4:d:10.1023_a:1027364031775
    DOI: 10.1023/A:1027364031775
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    Cited by:

    1. Andrew C. Call & Shuping Chen & Yen H. Tong, 2009. "Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts?," Review of Accounting Studies, Springer, vol. 14(2), pages 358-391, September.
    2. Stephen Makar & Li Wang & Pervaiz Alam, 2013. "The mixed attribute model in SFAS 133 cash flow hedge accounting: implications for market pricing," Review of Accounting Studies, Springer, vol. 18(1), pages 66-94, March.
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    4. Antonio Davila & Mohan Venkatachalam, 2004. "The Relevance of Non-financial Performance Measures for CEO Compensation: Evidence from the Airline Industry," Review of Accounting Studies, Springer, vol. 9(4), pages 443-464, December.
    5. Xuanpu Lin & Guoman She & Aaron Yoon & Haoran Zhu, 2025. "Shareholder value implications of supply chain ESG: evidence from negative incidents," Review of Accounting Studies, Springer, vol. 30(3), pages 2185-2217, September.

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