Academic journal article Journal of Business Economics and Management

Earnings Response Coefficients in the Greek Market

Academic journal article Journal of Business Economics and Management

Earnings Response Coefficients in the Greek Market

Article excerpt

1. Introduction

A fundamental issue of economics, finance and accounting involves the relation between the firm's reported earnings and its stock returns (Kormendi, Lipe 1987). Standard valuation models assume that price is the discount present value of future expected dividends or future cash flows. It is commonly assumed that, over long periods, re ported accounting earnings are directly related to future dividends and cash flows. Ball, Brown (1968) numerous studies have attempted at identifying whether reported earnings contain information used by the market for assessing the value of the common stock of the firm.

In the late 1980s, researchers started investigating a new area--the earnings response coefficient (ERC) that is theoretically defined as "a change in the price induced by a one-dollar change in current earnings" (Collins, Kothari 1989) and typically measured as a slope coefficient in a regression of stock returns on unexpected earnings (Markowitz 1952, 1959). While the studies on the average price-to-earnings ratio (Stankeviciene, Gembickaja 2012) are concentrated on market reactions to earnings announcements, the studies on the earnings response coefficient are more interested in the nature of information about reported earnings and how they are related to firm valuation (Kormendi, Lipe 1987).

The main objective of this study is to analyse the relationship between accounting data and market price returns of the companies listed in the Athens Stock Exchange (ASE). More specifically, the article describes if there is a statistically significant earnings response coefficient of the companies listed in the ASE conducting annual cross-sectional and intertemporal regression analysis. The paper endorses and advances the methodology used by Kothari, Sloan (1992) and Jindrichovska (2001). The major findings of this study may contribute to various groups of people such as investors, corporations, regulators, educators and researchers.

The present study is organised as follows: section two consists of literature review discussing various relevant issues of research on the earnings response coefficient. The purpose of this work is to provide the basic theoretical and a detailed review of the earnings response coefficient (ERC). Moreover, it presents an empirical foundation for other studies and their implications. Section three examines the issues of research design and provides the research method, including a detailed discussion of the model employed. Section four contains the description of data and core results obtained from statistical analysis and focuses on answering the research methodology developed in the previous chapter. Section five discusses and summarises the findings of the study, including limitation on the results and suggestions for future research.

2. Framing issues: theoretical considerations

There are many approaches for how accounting data affect market price returns. Ball, Brown (1968) documented a positive statistical association between earnings surprises and stock returns around earnings announcements. A voluminous body of research (Beaver et al. 1980; Brown et al. 1987; Beaver 1989) has examined the role of accounting earnings in financial markets. In rather influential papers, that prompted further research, Easton, Zmijewski (1989), Collins, Kothari (1989) and Kormendi, Lipe (1987) empirically tested the last implication. Ohlson, Schroff (1992) confirmed that if investors used other information than that about earnings and dividends alone, there was a reason to prefer one specification over the other. Easton, Harris (1991) used a different method and examined earnings as an explanatory variable for return and confirmed the relation ship between the level of earnings (scaled by price) and stock returns at the beginning of the period. The main difference in this study is that it has incorporated the level of and changes in earnings rather than only a change in earnings. …

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