Review of Accounting Studies

, Volume 16, Issue 4, pp 812–842

Does earnings acceleration convey information?

Article

DOI: 10.1007/s11142-011-9150-y

Cite this article as:
Cao, Y., Myers, L.A. & Sougiannis, T. Rev Account Stud (2011) 16: 812. doi:10.1007/s11142-011-9150-y

Abstract

Valuation theory, investment managers, financial analysts, and textbooks advocating horizontal financial statement analysis suggest that the change in earnings growth (earnings acceleration) conveys value relevant information. We test this assertion using a large sample of U.S. firms. Results from cross-sectional short-window (around earnings announcements) and long-window (annual) returns-earnings regressions reveal a strong association between contemporaneous returns and earnings acceleration after controlling for earnings levels and changes. Moreover, earnings acceleration is useful in predicting future earnings, and financial analysts appear to use the information in earnings acceleration in addition to earnings levels and changes in revising their forecasts. Furthermore, earnings acceleration conveys information incremental to that provided by changes in analysts’ forecasts of long-term earnings growth. This study extends the empirical returns-earnings model that includes only earnings levels and changes and shows that more useful information can be extracted from reported earnings numbers than has been previously documented.

Keywords

Earnings accelerationEarnings growthEarnings predictionStock returns

JEL Classification

G12M41

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Ying Cao
    • 1
  • Linda A. Myers
    • 2
  • Theodore Sougiannis
    • 3
  1. 1.School of AccountancyThe Chinese University of Hong KongShatinHong Kong
  2. 2.Sam M. Walton College of BusinessUniversity of ArkansasFayettevilleUSA
  3. 3.University of Illinois and ALBAChampaignUSA