A Nivel Internacional

When analysing accounting earnings’ relation with stock prices or stock returns, one normally looks at net earnings, change in net earnings or unexpected net earnings. Some researchers

have, however, used more detailed data to describe this relationship. Ramakrishnan and Thomas (1998) separate net income into permanent, transitory and price-irrelevant components of unexpected earnings. They claim that the price-earnings link is better described when multiplying each earnings component by a different earnings coefficient than when applying one single ERC to aggregated unexpected earnings. Unsurprisingly, their result suggests that different components of earnings have different valuation implications. Several papers suggest that extraordinary and special items are less value relevant than other earnings items (for instance Landsman, Miller, & Yeh, 2007). As a response to the lacking value relevance of some GAAP earnings items, analysts have increasingly started to focus on “Street” earnings numbers (Bradshaw & Sloan, 2002). Street earnings are pro-forma earnings numbers that typically exclude special items and non-cash items.19 In general, if earnings

components do not aggregate to a fully informative bottom line number, then information from income statement line items can help improve the accuracy of intrinsic value estimates (Pope, 2005).20

Ohlson and Penman (1992) acknowledge that the different line items of earnings may have different valuation implications. They claim this is due to investors perceiving differential measurement errors. Ohlson and Penman empirically analyse how disaggregated accounting data explains return. They run regressions using various components of earnings as explanatory variables. These components include gross margin, operating expenses, depreciation expense, tax expense, other income/expense items, and extraordinary/unusual line items. Ohlson and Penman find that the disaggregation of income data increases the explanatory power of their regressions (comparable results are reported by Carnes, 2006).

19

There is no common definition of Street earnings. In fact, Cornell and Landsman (2003) report that none of the pro-forma earnings measures released by companies are specifically defined.

They also find that although the estimated coefficients of the various line items vary in the short run, they have approximately the same magnitudes over long return intervals (10 years). They state that their empirical evidence is remarkably consistent with the idea of economic equivalence in line items. In the short run, however, the coefficients associated with income components that are considered difficult to measure (in particular depreciation and tax expenses) are lower than the coefficients of less problematic components. Dhaliwal et al. (1999) construct a measure of comprehensive income by adding dirty surplus items to net income. They find no clear evidence that comprehensive income is more strongly associated with returns than is net income. In addition, their results suggest that comprehensive income is less associated with market value of equity than reported net income.

Recent research has also disaggregated income data into foreign and domestic income and investigated the value relevance of each measure. Thomas’ (1999) empirical study indicates that investors understate foreign earnings’ persistence. In other words, foreign earnings have a very low ERC compared to domestic earnings. Thomas maintains that this makes it possible to construct a zero-investment hedge portfolio that consistently earns positive returns over years. He acknowledges that the abnormal returns may be due to misspecification of risk, but claims that further analyses show that this is probably not the case. According to Thomas, the market corrects fully for its possible mispricing in the long run – abnormal returns do not persist for more than a year. The results within this area of research are, however, mixed. Contrary to Thomas (1999), Bodnar and Weintrop (1997) find that investors place a higher weight on foreign earnings than on domestic earnings when valuing companies. They explain their result partly by the higher growth opportunities in foreign markets. Hope and Kang

20

Sometimes non-GAAP measures are claimed to be the preferred performance metrics; for instance, take revenue per passenger mile (airline industry), value of new orders (homebuilding industry), and same-store sales (retail restaurants) (Francis, Schipper, & Vincent, 2003).

(2005) suggest that the results of Bodnar and Weintrop may be due to a misspecification of their model. When excluding what Hope and Kang call “other information”, the regression specification might suffer from an omitted variables problem. “Other information” is defined as relevant information other than current earnings in pricing securities. Hope and Kang regard information contained in revisions of analysts’ forecast of future earnings and terminal values as an important source of “other information.” When using their “other information” variable, the explanatory power of the return-earnings regressions increases. The bias from excluding “other information” has a greater effect on foreign earnings than domestic earnings, and foreign earnings are no longer incrementally value relevant when controlling for “other information.” Callen et al. (2005) do, however, document that domestic earnings contribute significantly more to unexpected stock price variability than do foreign earnings.

In general, accounting information can be disaggregated in order to measure sensitivities of a vast number of variables to stock returns. Anthony and Ramesh (1992) look at the response coefficients of sales growth and capital investment. They present theoretical evidence that acquisition of market share and capital capacity is highly valued in early life cycle stages. Hence, they hypothesise that both variables are a function of the life cycle stage. Anthony and Ramesh claim that it is reasonable to expect a higher stock price reaction to unexpected sales growth and unexpected capital expenditure in the early life cycle stages. Using dividend payout, sales growth and firm age as indicators of life cycle stage, the hypothesis is confirmed in their empirical study. The authors conclude that there is a monotonic decline in the response coefficients of unexpected sales growth and unexpected capital investment from the growth to the stagnant stages. Their result on capital expenditure is supported by Kerstein and Kim (1995), who find that unexpected capital expenditure changes are strongly and positively associated with excess returns. They conclude that these expenditures yield information about

future earnings that is not captured by current earnings. Chen and Zhang (2007) introduce a theoretical model where stock returns are related to the earnings yield, capital investment, changes in profitability and growth opportunities, as well as to changes in the discount rate. They also present empirical support for their model.