Aggregate earnings and stock market returns: The good, the bad, and the state-dependent

Abstract

a b s t r a c tPrior research documents a negative aggregate earnings-returns relation. In contrast, we posit that the sign of the relation varies, depending upon the macroeconomic and financial market conditions that exist in the earnings announcement quarter. We argue that the existing macroeconomic and financial market conditions influence market participants' frame of reference, which in turn affects whether they interpret aggregate earnings surprises to be informative about the expected inflation component of the discount rate, the market risk premium component of the discount rate, or aggregate future cash flows. Consistent with this, we find that the sign of the aggregate earnings-returns relation changes numerous times across our sample period. We also find that market participants interpret aggregate earnings to be informative about changes in expected inflation (market risk premium) when the sign of the aggregate earningsreturns relation is negative (positive). Finally, we identify macroeconomic and financial market conditions under which the aggregate earnings-returns relation is more (less) likely to be negative (positive).

Measuring the Behavioural Component of the S&P 500 and its Relationship to Financial Stress and Aggregated Earnings Surprises

“…In this regard, we use the aggregate earnings surprise index announced in quarter t, aggEsAR(1) t (see Kothari, Lewellen and Warner, ). This index is generally seen as a valid proxy for the systematic component of an individual company's earnings surprise and, therefore, a signal about macroeconomic news (Cready and Gurun, ; Zolotoy, Frederickson and Lyon, ). Consistent with Kothari, Lewellen and Warner () and Zolotoy, Frederickson and Lyon (), the estimation is performed on the S&P 500 constituents after 1970 because of limitations in data coverage of Compustat prior to this year.…”

“…Our contribution goes beyond previous studies, as it analyses the relationship between the behavioural component and aggregate earnings surprises, which are generally considered as a proxy for the systematic component of firms' earnings and, therefore, a signal of macroeconomic news (Ball and Sadka, ; Cready and Gurun, ; Kothari, Lewellen and Warner, ; Zolotoy, Frederickson and Lyon, ).…”

Pendekatan Model Markov Switching Pada Pasar Modal Indonesia

“…Hasil nya adalah penggabungan model tersebut meng hasilkan prediksi yang lebih baik. (Zotoloy, Federickson, & Lyon, 2017) Pene litian ini meneruskan dokumentasi dari hubungan pengembalian pendapatan keselu ruhan yang negatif di masa depan. Penelitian ini menggunakan metode markov.…”

Companies Financial Performance as a Signal for Investor in Predicting Stock Price, with Macroeconomics Variable as Control Variable

“…Macro economy condition and financial market which are the main factors of outside the control of companies, can affect the market participants preferences so that in turn they affect how they are interpreting changes in aggregate earnings [3]. In this research, financial ratios are used as a proxy to measure the financial performance of companies.…”