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A Structural Break in the Aggregate Earnings–Returns Relation

Author

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  • Asher Curtis
  • Chang-Jin Kim
  • Hyung Il Oh

Abstract

This study empirically estimates the date of the structural change in the aggregate earnings–returns relation and reports it as the fourth quarter of 1991. We identify three sources of the structural change: (i) an increase in the relative importance of cash flow news contained in stock returns; (ii) a decrease in the importance of discount rate news contained in aggregate earnings; and (iii) a decrease in the persistence or the predictability of aggregate earnings and returns. Next, we examine the components of aggregate earnings and find that the change in the aggregate earnings–returns relation is largely driven by intertemporal changes in aggregate inventory accruals, suggesting the structural change is attributable to improved inventory management systems.

Suggested Citation

  • Asher Curtis & Chang-Jin Kim & Hyung Il Oh, 2024. "A Structural Break in the Aggregate Earnings–Returns Relation," Journal of Financial Econometrics, Oxford University Press, vol. 22(5), pages 1785-1808.
    • Handle: RePEc:oup:jfinec:v:22:y:2024:i:5:p:1785-1808.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbae015
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    More about this item

    Keywords

    aggregate earnings–returns relation; structural change; discount rate news; cash flow news; persistence; great moderation;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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