Accounting Anomalies, Risk and Return

Penman, Stephen H.; Zhu, Jia

doi:10.2139/ssrn.1934365

Cited by 15 publications

(2 citation statements)

References 85 publications

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“…Mispricing can be due to costs of acquiring information (Landsman et al., ), transaction costs and limits to arbitrage (Ng et al., ; Zhang et al., ), divergence of opinions (Garfinkel and Sokobin, ) or time of the year (Mashruwala and Mashruwala, ). However, Penman and Zhu () find that excess returns can be consistent with rational pricing if earnings and revisions in earnings growth expectations are considered appropriately. Finally, mispricing can also arise because of errors in estimating discount factors; this is the case if uncertainty‐averse investors price firms at a discount because they cannot determine the uncertainty.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Earnings Quality Measures and Excess Returns

Perotti

Wagenhofer

2014

Business Fin & Account

111

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This paper examines how commonly used earnings quality measures fulfill a key objective of financial reporting, i.e., improving decision usefulness for investors. We propose a stock-price-based measure for assessing the quality of earnings quality measures. We predict that firms with higher earnings quality will be less mispriced than other firms. Mispricing is measured by the difference of the mean absolute excess returns of portfolios formed on high and low values of a measure. We examine persistence, predictability, two measures of smoothness, abnormal accruals, accruals quality, earnings response coefficient and value relevance. For a large sample of US non-financial firms over the period 1988–2007, we show that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings. Accruals measures generate the largest spread in absolute excess returns, followed by smoothness and market-based measures. These results lend support to the widespread use of accruals measures as overall measures of earnings quality in the literature.

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Section: Hypotheses Developmentmentioning

confidence: 99%

Earnings Quality Measures and Excess Returns

Perotti

Wagenhofer

2014

Business Fin & Account

111

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“…While the focus is on pricing models with B/P, the framework in the paper is quite general for identifying characteristics that pertain to risk and return. For example, Penman and Zhu () take the framework developed in this paper to investigate a number of ‘anomalies’ that have appeared in empirical analysis.…”

Section: Resultsmentioning

confidence: 99%

A framework for identifying accounting characteristics for asset pricing models, with an evaluation of book‐to‐price

Penman

Reggiani

Richardson

et al. 2018

Euro Fin Management

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We provide a framework for identifying accounting numbers that indicate risk and expected return. Under specified accounting conditions for measuring earnings and book value, book‐to‐price (B/P) indicates expected returns, providing justification for B/P in asset pricing models. However, the framework also points to earnings‐to‐price (E/P) as a risk characteristic. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. Using this framework we resolve a puzzle: in contrast to previous empirical research, we find that leverage is positively associated with future returns, as predicted by theory.

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