Share Price Anticipation of Earnings and the Effect of Earnings Persistence and Firm Size

Donnelly, Ray; Walker, Martin

doi:10.1111/j.1468-5957.1995.tb00668.x

Cited by 35 publications

(44 citation statements)

References 18 publications

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“…However, O'Hanlon concludes that UK share returns are not a particularly strong lead indicator of accounting results. In addition, recent research by Donnelly & Walker (1995) suggests that share prices in the UK lead earnings to a lesser extent than that reported by Kothari & Sloan for the USA market. Donnelly & Walker also show that share prices in the UK lead earnings more strongly for the larger firms in their sample.…”

Section: Previous Researchmentioning

confidence: 67%

“…Other precedents for the use of actual rather than expected returns include the works of Ohlson (1991), Easton & Harris (1991) and Easton, Harris & Ohlson (1992). In addition, Donnelly & Walker (1995) provide a justification for their assertion that raw returns are at least as useful as expected returns in research designs other than those of an event study nature. 3 Based on these considerations, the present paper also utilizes actual rather than abnormal security returns.…”

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confidence: 96%

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The Information Content of Security Prices on the Irish Stock Exchange

O'Connell

1995

The British Accounting Review

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Section: Previous Researchmentioning

confidence: 67%

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confidence: 96%

The Information Content of Security Prices on the Irish Stock Exchange

O'Connell

1995

The British Accounting Review

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“…Kothari and Sloan (1992) using X t /P t-( , as an explanatory variable for returns, show that increasing ( through to 4 results in improved estimates of ERC for US companies. Donnelly and Walker (1995) show that increasing ( from 1 to 2 ameliorates the bias in estimates of ERC for both levels and changes models in the UK.…”

mentioning

confidence: 96%

“…However, size (Freeman, 1987;and Collins et al 1987) is the only variable which has been demonstrated to explain empirically how prices anticipate earnings in the US. Donnelly and Walker (1995) demonstrate that both size and earnings persistence are related to price anticipation of earnings in the UK. This paper uses variables that prior literature suggests are related to a firm's information environment to better understand its influence on the return-earnings relation.…”

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confidence: 96%

Cross‐sectional Variation in Price Anticipation of Earnings

Donnelly

1998

Business Fin & Account

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Estimates of the earnings response coefficient (ERC) can be improved by including leading returns in return-earnings models. This improvement in estimated ERC can be used to measure price anticipation of earnings. It is posited that this price anticipation is related to the information environment of a firm. Theories and prior empirical research pertaining to the information environment (e.g. Bhushan, 1989; Frankel et al., 1994) are used to identify three variables, breadth of trading, capital issues and volatility of returns, which potentially determine the extent of price anticipation of earnings. The empirical tests suggest that the tendency of prices to lead earnings is negatively related to thin trading and is positively related to the propensity for external financing and return volatility in the year immediately prior to that to which the anticipated earnings pertain. Copyright Blackwell Publishers Ltd 1998.

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“…Cash flows from operations have been identified as a reliable substitute for earnings when the information content of earnings is low. Prior studies have suggested that extreme earnings provide less information content than moderate earnings because extreme earnings tend to be less persistent (Freeman and Tse, 1992;Ali, 1994;Donnelly and Walker, 1995). Accrual management literature also indicates that alternative performance substitutes such as operating cash flows provide additional information content at extreme levels of earnings (Healy and Wahlen, 1999).…”

Section: Theoretical Background and Hypothesesmentioning

confidence: 99%

The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure

Kent¹

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This thesis examines whether cash flow disclosure under International Accounting Standard (IAS) 7 has an influence on the degree of information asymmetry incurred by market participants. We evaluate the impact of cash flow disclosure for ASX (Australian Securities Exchange) listed companies and its association with value relevance, prediction of future cash flows, earnings and cost of capital. The following three essays in this thesis demonstrate that the type of cash flow disclosure reported by ASX listed companies can change the amount of information asymmetry experienced by investors. Essay 3 examines whether the choice of cash flow disclosure under IAS 7 has an influence on the cost of capital incurred by ASX listed companies. A matched pairs sample is created using replacement to assess whether cost of debt or equity is associated with cash flow disclosure.Companies reporting the indirect method on average pay a higher cost of debt by 100 basis points iii although this result is not significantly different from companies reporting the direct method.Company size and interest coverage are both significant at a 1 per cent level in explaining the cost of debt. Return on assets (ROA) and leverage are also significant at the 10 per cent level for cost of debt.Cost of equity is examined using the Capital Asset Pricing Model (CAPM) with no evidence to suggest that cash flow disclosure is associated with a company's cost of equity. Overall, Essay 3 demonstrates that the cost of capital incurred by ASX listed companies is not related to their choice of cash flow disclosure.iv

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Share Price Anticipation of Earnings and the Effect of Earnings Persistence and Firm Size

Cited by 35 publications

References 18 publications

The Information Content of Security Prices on the Irish Stock Exchange

The Information Content of Security Prices on the Irish Stock Exchange

Cross‐sectional Variation in Price Anticipation of Earnings

The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure

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