The information content of permanent versus transitory earnings: UK evidence
by Wael Mostafa
International Journal of Accounting and Finance (IJAF), Vol. 5, No. 2, 2015

Abstract: This study examines whether UK investors perceive permanent earnings to be different from transitory earnings. Specifically, the current study investigates the relative informativeness (measured by earnings response coefficient) of permanent earnings compared to transitory earnings. The study uses a contextual model (of the relation between stock returns and accounting earnings) with a dummy variable approach that allows parameter shifts for firm-years having transitory earnings. The results of the study indicate that the earnings response coefficient is significantly positive for permanent and transitory earnings. However, the earnings response coefficient is significantly higher for permanent earnings compared to transitory earnings. These results are consistent with US findings and suggest that permanent earnings have more information content than transitory earnings. The results of this study could reflect two different things if we think about a standard model in which price is the present value of future earnings: i) a given level of earnings will have greater implications for future earnings if the earnings are permanent, causing a larger stock price response; ii) firms with more volatile earnings could be riskier, and, therefore the discount rate would be higher.

Online publication date: Sat, 19-Sep-2015

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

 
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Accounting and Finance (IJAF):
Login with your Inderscience username and password:

Username:        Password:          Forgotten your password?

Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email subs@inderscience.com