کیفیت سود و رابطه ناهمگونی درآمد و بازده سهام
Abstract
We adopt a heterogeneous regime switching method to examine the informativeness of accounting earnings for stock returns. We identify two distinct time-series regimes in terms of the relation between earnings and returns. In the low volatility regime (typical of bull markets), earnings are moderately informative for stock returns. But in high volatility market conditions (typical of financial crisis), earnings are strongly related to returns. Our evidence suggests that earnings are more informative to investors when uncertainty and risk is high which is consistent with the idea that during market downturns investors rely more on fundamental information about the firm. Next, we identify groups of firms that follow similar regime dynamics. We find that the importance of accounting earnings for returns in each of the market regimes varies across firms: certain firms spend more time in a regime where their earnings are highly relevant to returns, and other firms spend more time in a regime where earnings are moderately relevant to returns. We also show that firms with poorer accrual quality have a greater probability of belonging to the high volatility regime.
Introduction
Accounting and finance have a long tradition of studying the relation between accounting earnings and stock market returns. This interest is driven by the importance of earnings to investment decisions and to the prediction of returns. In their asset allocation decisions, investors form expectations about the firm’s future cash flows and the risk associated with these cash flows (Fama 1970). As earnings contain information about the stream of cash flows, investors use earnings information to revise their expectations about future flows and this leads to a revision of stock prices. In other words, earnings are useful for stock price formation. Prior studies have focused on explaining the time series variation or the cross-sectional variation in the earnings-return relation. We propose to study both the temporal and cross-sectional variation in the relation between earnings, earnings changes and returns using an extension of the regime switching methodology introduced by Hamilton (1989): the heterogeneous regime switching methodology. The heterogeneous regime switching method can be summarized as follows. First, we estimate the time series variation in the earnings-returns relation for the sample firms for the period 1997–2010. The estimation method allows us to identify breaks in the time series of earnings-returns and to characterize each regime. As a result, we are able to let the data generating process determine the regime rather than identifying the breaks ex-ante which would be subjective. Second, each firm is assigned to a group (or cluster) based on how long it stays in one regime and the likelihood of switching to the other regime. Thus, the model is dynamic as it allows firms to switch between regimes across time.