Economic determinants of price informativeness about future earnings |
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Authors: | Jay Junghun Lee |
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Affiliation: | Department of Accounting and Finance, College of Management, University of Massachusetts Boston, 100 Morrissey Boulevard, Boston, MA 02125-3393, United States |
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Abstract: | This study investigates how the value-creation process affects the extent to which stock prices incorporate value-relevant information about future earnings. In contrast to previous studies focusing on the value-reporting process, this paper shows that strong product market power accelerates the incorporation of future earnings into current equity prices due to less uncertainty about future cash flows and that intensive long-term investment deters such incorporation because of greater uncertainty regarding future cash flows. The results suggest that firm fundamentals shaped by product market competition and long-term investment explain the price informativeness about future earnings beyond the impact of management’s reporting discretion. |
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Keywords: | Price informativeness Future earnings response coefficient (FERC) Product market power Long-term investment Fundamental uncertainty G14 M41 |
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