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Intertemporal variation in the information content of aggregate earnings and its effect on the aggregate earnings-return relation

Author

Listed:
  • Jaewoo Kim

    (University of Oregon)

  • Bryce Schonberger

    (University of Rochester
    University of Colorado at Boulder)

  • Charles Wasley

    (University of Rochester)

  • Hunter Land

    (Vanderbilt University)

Abstract

We develop and test explanations for sources of intertemporal variation in the information content of aggregate earnings and how that variation explains variation in the relation between aggregate earnings growth and market returns over time. We find that the correlation between aggregate earnings growth and leading market-wide real output shocks (measured by the growth in the Federal Reserve Board’s index of industrial production) becomes more pronounced in the 1990s and 2000s, which explains why the aggregate earnings-return relation is significantly positive in this period. Further analysis shows that an increasingly positive relation between aggregate earnings growth and real output shocks is attributable to the changing nature of the economic activity in the United States, namely, a shift in the composition of firms toward financial services and away from manufacturing. Changes in accounting measurement rules over time to include more fair value estimates also play a role in explaining why the aggregate earnings–return relation has become significantly positive in recent decades.

Suggested Citation

  • Jaewoo Kim & Bryce Schonberger & Charles Wasley & Hunter Land, 2020. "Intertemporal variation in the information content of aggregate earnings and its effect on the aggregate earnings-return relation," Review of Accounting Studies, Springer, vol. 25(4), pages 1410-1443, December.
    • Handle: RePEc:spr:reaccs:v:25:y:2020:i:4:d:10.1007_s11142-020-09538-9
    DOI: 10.1007/s11142-020-09538-9
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    More about this item

    Keywords

    Aggregate earnings; Aggregate earnings-return relation; Market returns; Real output; Industrial production growth; Financial sector; Fair value accounting;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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