The relationship between accounting numbers and returns: some empirical evidence from the emerging market of the Czech Republic

Abstract

Generally, stock prices reflect future expectations of earnings, whereas accounting data reflect past performance. This paper attempts to discover the relationship between accounting data and market price returns of the companies listed on the Prague Stock Exchange (PSE). The Prague Stock Exchange was established in 1993 and provides an opportunity to make a comparison between a newly established market and the findings of studies of established markets. There has been a wealth of publications and accounting research studies on developed markets. Generally, accounting attributes are thought to be relevant because they tend to be contemporaneously statistically associated with stock prices. Some studies have suggested, and empirically tested, that stock prices lead earnings (e.g. Collins et al., 1987; Kothari, 1992; Kothari and Sloan, 1992; Kothari and Zimmerman, 1995). This study tests the existence of such a relationship in the Czech capital market, relying partially on the methodology proposed by Kothari and Sloan (1992) and Kothari (1992). This paper investigates whether there is a statistically significant permanent relationship between returns and accounting data on the Czech market. The study was conducted using accounting earnings and stock prices during the period 1993-8. The empirical evidence here suggests that a similar relation exists on the emerging Czech market. The relation is statistically significant for measurement windows of one year and longer. The increase in the mean response coefficient, reported later in this study, suggests that one-leading-year returns are as important as contemporaneous returns in terms of their sensitivity to annual earnings changes. However, one cannot infer with a degree of confidence that the Czech capital market views earnings changes to be largely permanent, which would be consistent with the time-series properties of annual earnings.

Earnings Response Coefficients in the Greek Market

“…More specifically, the article describes if there is a statistically significant earnings response coefficient of the companies listed in the ASE conducting annual cross-sectional and intertemporal regression analysis. The paper endorses and advances the methodology used by Kothari, Sloan (1992) and Jindrichovska (2001). The major findings of this study may contribute to various groups of people such as investors, corporations, regulators, educators and researchers.…”

“…According to Kothari, Sloan (1992) and Jindrichovska (2001), investors anticipate the numbers of future earnings at least some periods ahead. This is what is meant by "prices lead earnings".…”

“…Using the methodology suggested by Kothari, Sloan (1992), the degree of the relationship between price relatives (one plus the buy-and-hold return) and earnings-to-price ratio (earnings yield) is tested using a quarterly, yearly and intertemporal sample. It is employed the earnings level like Kothari, Sloan (1992) and Jindrichovska (2001) did, rather than change, deflated by price as the explanatory variable in the price earnings regression, which is motivated by the random walk time series property of annual earnings Ohlson (1995), and the evidence in Easton, Harris (1991) and Maditinos et al (2007). First, the model using contemporaneous earnings and prices is employed:…”

“…Jermakowicz, Gornik-Tomaszewski (1998) evidenced a significant association between stock returns and accounting earnings and concluded that the annual earnings were an important element of the valuation process of a firm. Jindrichovska (2001), following the methodology proposed by Kothari and Sloan (1992), reported that one-leading-year returns were as important as contemporaneous returns in terms of their sensitivity to annual changes in earnings. Jarmalaite (2002), on the basis of the methodology developed by the same Kothari, Sloan (1992), analysed the relationship between accounting data and stock price returns in the stock markets of Lithuania, Latvia and Estonia.…”

Relacionamento temporal entre lucros trimestrais e retorno das ações no Brasil

“…Além disso, a análise de cointegração indicou que ao incluir a correção de erro com base em variáveis de preço não estacionárias, melhorou significativamente a associação observada entre as variáveis contábeis e de mercado de ações. Jindrichovska (2001) investigou a relação entre os dados contábeis e o retorno do preço de mercado das ações das empresas listadas na Bolsa de Valores de Praga (PSE), por meio de uma análise de cointegração. Foram analisadas 63 empresas industriais da República Tcheca entre de 1993 a 1998.…”