Abstract
Having examined the relation between equity value and accounting data, we now shift the focus of discussion to equity return. Returns arise from changes in value (plus dividends); so the return function is a derivative of the value function. We continue to use the ROM framework in this chapter. Our objective is to gain a better understanding of how equity returns relate to specific accounting variables that convey a firm’s value generating activities.
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Appendix A: Variable Measurement for Empirical Analysis
Appendix A: Variable Measurement for Empirical Analysis
The stock return (R t ) is the return from 2 days after the prior year’s earnings announcement to 1 day after the current year’s earnings announcement; earnings yield (x t ) is earnings (X t ) divided by the beginning-of-period market value of equity (V t-1 ); profitability change \(( \Delta {roe_{it }}) \)is year t profitability ROE t minus year t-1 profitability, ROE t-1 , multiplied by the beginning-of-period book-to-market ratio (B it-1 /V it-1 ); capital investment \((\Delta {b}) \)is the change in the book value of equity relative to the prior year multiplied by (V it-1 /B it-1 − 1)/V it-1 ; growth opportunity change (\( \Delta {g_{it }} \)) is the change in the median analyst forecast of the long-term growth rate following the current year earnings announcement relative to that of the prior year multiplied by B it-1 /V it-1 ; discount rate change (\( \Delta {r_{it }} \)) is the change of the 10-year US Treasury bond yield over the return period multiplied by B it-1 /V it-1 .
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Zhang, G. (2014). Accounting Information and Equity Returns: A Derivative of the Value Function. In: Accounting Information and Equity Valuation. Springer Series in Accounting Scholarship, vol 6. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8160-7_9
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DOI: https://doi.org/10.1007/978-1-4614-8160-7_9
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