The Relationship between Earnings and Stock Returns: Empirical Evidence from the Greek Capital Market

Abstract

The relationship between earnings figures and stock returns has been a topic of international research since decades. The purpose of this paper is to investigate the above relationship in the context of the Greek capital market. Previous studies resulted in controversial results regarding the usefulness of models which were using earnings levels or earnings changes as the explanatory variable. In an introductory context, this study examines the earnings-return relation applying four models, proposed by Kothari and Zimmerman (Journal of Accounting and Economics, 20, 155-192, 1995), on individual Greek stocks as well as portfolios between 1994-2004. The overall results, demonstrated a significant value relevancy of accounting earnings prepared under the Greek GAAP. Specifically in the Greek stock market the price model produces less biased ERC's than the return model but suffers from various econometric problems. Also, the use of cross-sectional and time-series aggregated data results in a large increase in the explanatory power of earnings for returns (for the return and differenced model) yielding more significant Earnings Response Coefficients.

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