Title: Does lack of timeliness explain low contemporaneous returns-earnings association?

Authors: Jaouida Elleuch Trabelsi

Addresses: Institute of the High Commercial Studies of Sfax (IHEC), University of Sfax, UR: MO.DE.S.FI, P.O. Box 43 – 3061, Sfax, Tunisia

Abstract: This paper empirically tests whether the low contemporaneous returns-earnings association set by previous empirical researches may be explained by lack of timeliness of accounting numbers. It hypothesises that if the criteria for accounting recognition yield a multi-period lag in earnings recognitions of economic events, and if these events affect an informed market immediately when they occur, then future periods' earnings would have explanatory power for current returns as well as current earnings. To assess the significance of future earnings as an explanatory variable for stock returns we regress at first step annual returns on current earnings and at second step, annual returns on current earnings and successively next period and next two periods' earnings. Results show that future earnings continue to explain current returns. The evidence is characteristic of a substantial recognition lag in earnings that extends to the immediate next period. However, over one year, earnings do not seem to reflect any relevant economic event impounded in security prices at previous period. The earnings recognition lag seems to decrease after one year.

Keywords: value relevance; accounting earnings; timeliness; returns-earnings association; future earnings; variables; stock returns.

DOI: 10.1504/AAJFA.2014.064174

Afro-Asian Journal of Finance and Accounting, 2014 Vol.4 No.3, pp.226 - 238

Received: 30 Sep 2013
Accepted: 28 Apr 2014

Published online: 01 Aug 2014 *

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