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Earnings As An Explanatory Variable For Returns: A Note, A. Frino, G. Tibbits

Faculty of Business - Accounting & Finance Working Papers

Easton and Harris (1991) [herein EH], in a recent article, "investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings/returns associations" [p 19]. As stated by EH, the contribution of their study stems from their variable of interest, which is not the earnings-to-price ratio based on contemporaneous (past) earnings and contemporaneous (past) price which has dominated earlier studies. Despite their excellent empirical work, unfortunately, their theorising is somewhat ad hoc and they admit that for certain aspects of their theorising "we provide a more heuristic analysis" [footnote, p. …