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Why is the Value Relevance of Earnings Lower for High-Tech Firms?

In: Advances In Quantitative Analysis Of Finance And Accounting

Author

Listed:
  • B. Brian Lee

    (Prairie View A&M University, USA)

  • Eric Press

    (Temple University Philadelphia, USA)

  • B. Ben Choi

    (Victoria, Canada)

Abstract

This chapter examines the value relevance of earnings in high- and low-technology industries, a topic about which unresolved questions remain. The focus is on high-tech firms, given assertions that financial reporting is least effective for their industries. It is found that adjusting for expense mismatching is more effective in low-tech industries, while diversifying noise in high-tech industries substantially increases the association of earnings and stock returns. The value relevance of earnings for either type is indistinguishable when noise and expense mismatching are jointly controlled. It is thus concluded that noise arising from uncertainty of realizing future R&D benefits is the main factor explaining the weaker association of earnings and stock returns for high-tech firms.

Suggested Citation

  • B. Brian Lee & Eric Press & B. Ben Choi, 2008. "Why is the Value Relevance of Earnings Lower for High-Tech Firms?," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting, chapter 4, pages 49-82, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789812791696_0004
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    More about this item

    Keywords

    Hedging Strategies; Expense Mismatching; Stock Split; Trading Volume; Portfolio Optimization; Intraday Patterns; Earnings Management; International Winner-Loser Effect;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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