| Pub. Date | : Jan, 2024 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP020124 |
| Author Name | : Vaibhav Lalwani and Madhumita Chakraborty |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 7 |
Accounting literature boasts a long list of studies on the impact of earnings information on stock prices. Recently, this strand of literature has been given a new twist by exploring the dynamics of earnings-returns relation at the aggregate level. The knowledge about this relationship is particularly useful for investors who hold diversified portfolios. The paper tests if the aggregate earnings-returns relationship is different when stocks are grouped according to different characteristics such as size, value, profitability and investment. The results suggest that the relation between aggregate earnings and stock returns is relatively stronger for large-cap and growth stocks as compared to small-cap and value stocks. These findings are valuable for investors and fund managers who use factor-based strategies to manage their investments.
Finance literature has a tradition of studying corporate earnings and their impact on stock prices. However, as noted by Ball and Sadka (2015), any study on the relation between an individual firm's earnings and stock prices is of interest only for active investors, i.e., those who hold undiversified portfolios and trade on the assumption that they can predict earnings surprises better than other investors. Passive investors, on the other hand, hold diversified portfolios (e.g., market portfolio), and thus firm-level analysis may not help understand the impact of earnings changes on their wealth. Therefore, the relation between aggregate (portfolio level) earnings and stock returns needs to be studied for such investors.