How do accounting variables explain stock price movements? Theory and evidence |
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| Institution: | 1. Marshall School of Business, University of Southern California, USA;2. C.T. Bauer College of Business, University of Houston, USA;3. Haas School of Business, University of California at Berkeley, Berkeley, CA 94720, USA;1. Jon M. Huntsman School of Business, Utah State University, 3540 Old Main Hill, Logan, UT 84322, USA;2. Olin Business School, Washington University in St. Louis, One Brookings Drive, St. Louis, MO 63130, USA;3. Marshall School of Business, University of Southern California, 3660 Trousdale Parkway, Los Angeles, CA 90089, USA;1. Tippie College of Business, University of Iowa, Iowa City, IA 52242, USA;2. Fisher College of Business, The Ohio State University, Columbus, OH 43210, USA;1. Nanyang Technological University, Singapore 639798;2. City University of Hong Kong, Tat Chee Avenue, Hong Kong |
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| Abstract: | This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang, G. 2000. Accounting information, capital investment decisions, and equity valuation: theory and empirical implications. Journal of Accounting Research 38, 271–295], who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and changes in profitability, growth opportunities, and discount rates. Empirical results confirm the predicted roles of all identified factors. The model explains about 20% of the cross-sectional return variation, with cash-flow-related factors (as opposed to changes in discount rates) accounting for most of the explanatory power. The properties of the model are robust across various subsamples and periods. |
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