Investor learning, earnings signals, and stock returns View Full Text


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Article Info

DATE

2019-03-11

AUTHORS

Peng-Chia Chiu, Timothy D. Haight

ABSTRACT

Prior studies show that investor learning about earnings-based return predictors from academic research erodes return predictability. However, the signaling power of “bottom-line” earnings has declined over time, which complicates assessments of investor learning about profitability signals underlying earnings. We show that modified earnings variables with lower susceptibility to signal weakening exhibit rates of return attenuation that are 30–64% lower than rates for bottom-line earnings variables over our sample period. Notably, return gaps between bottom-line and less susceptible variables are widest in recent years, especially within non-overlapping samples and samples with weak bottom-line signals (e.g., special items, losses, fourth fiscal quarter). Our results hold after controlling for risk factors known to predict returns, they do not appear to be attributable to ex ante earnings volatility, and they are robust to alternative sample selection criteria, sub-period partitions, and portfolio holding windows. Overall, our results suggest that while investor learning is apparent in the data, learning efforts to date have been suboptimal at exploiting profitability signals within firms’ earnings streams. More... »

PAGES

1-28

References to SciGraph publications

  • 1997-07. Does Post-Earnings-Announcement Drift in Stock Prices Reflect A Market Inefficiency? A Stochastic Dominance Approach in REVIEW OF QUANTITATIVE FINANCE AND ACCOUNTING
  • 2013-09. The supraview of return predictive signals in REVIEW OF ACCOUNTING STUDIES
  • 2011-09. How well do investors understand loss persistence? in REVIEW OF ACCOUNTING STUDIES
  • 2017-01. Has momentum lost its momentum? in REVIEW OF QUANTITATIVE FINANCE AND ACCOUNTING
  • 2010-05. The pricing of accruals for profit and loss firms in REVIEW OF QUANTITATIVE FINANCE AND ACCOUNTING
  • 2000-12. The Value Relevance of Multiple Occurrences of Nonrecurring Items in REVIEW OF QUANTITATIVE FINANCE AND ACCOUNTING
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    http://scigraph.springernature.com/pub.10.1007/s11156-019-00803-w

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    http://dx.doi.org/10.1007/s11156-019-00803-w

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