Valuation Implications of Investment Opportunities and Earnings Permanence |
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| Authors: | Jones Jefferson P Morton Richard M Schaefer Thomas F |
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| Institution: | (1) School of Accountancy, Auburn University, 301 Lowder Business Building, Auburn, AL, 36849-5247;(2) Department of Accounting, College of Business, Florida State University, Tallahassee, FL, 32306-1042;(3) Department of Accountancy, University of Notre Dame, 102 College of Business Building, Notre Dame, IN, 46556-5646 |
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| Abstract: | This study investigates the value-relevance of accounting earnings in the presence of investment (growth) opportunities after making two theoretical and methodological research design refinements. First, we test for the incremental effect of growth on firms earnings response coefficients after controlling for the extent of transitory earnings under the assumption that the value-relevance of earnings with respect to growth should be stronger when earnings are more permanent. Second, we perform comprehensive factor analysis using market-based and accounting-based measures to construct a composite proxy for investment opportunities. We find that firms investment opportunities and the relative permanence of current earnings affect the value-relevance of those earnings. Additionally, we find that the interaction between permanent earnings and investment opportunities produces an even stronger price response to earnings. |
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| Keywords: | investment opportunities earnings permanence |
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