Article Abstract:
The findings of Easton and Harris (1991) regarding the explanatory power of both earnings changes and levels when simultaneously included in a regression on abnormal returns are replicated and analyzed with respect to earnings levels. Given that annual earnings can be described by an IMA (1,1) process, the latter variable is relevant to the earnings-returns specification because earnings in previous periods have transitory components. The more pronounced these components are, the larger the increase in the earnings response coefficient or ERC and in the explanatory power of the model upon introduction of the level variable. These results suggest that the low predictive power and ERCs obtained from annual unexpected earnings-abnormal returns studies which assume that annual earnings follow a random walk are due to measurement errors in unexpected earnings.
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Article Abstract:
A discussion and summary of findings in a study of intangible assets and stock prices before the establishment of the SEC is presented. Asset data from 405 balance sheets dated 1927 is divided according to company into three groups: MD firms, or those disclosing material amounts of intangibles; ND firms, disclosing immaterial or nominal amounts; and AD firms, those with no separate disclosure of intangibles. The study concludes that value relevance of book value for MD firms does depend on its decomposition into tangible and intangible assets but finds no evidence of positive relation between capitalized intangibles and share price.
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Article Abstract:
The authors discuss the usefulness of financial statements to corporate investors, focusing on the relationship between cash flow and returns. Suggestions for improving the worth of financial information include management of intangible investments, and restatement of financial accounts.
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