Review of Accounting Studies

, Volume 19, Issue 1, pp 134–160 | Cite as

Detecting news in aggregate accounting earnings: implications for stock market valuation

  • Panos N. Patatoukas


How much news is there in aggregate accounting earnings? I provide evidence that earnings changes at the stock market level are correlated with new information about not only expected future cash flows but also discount rates. A comprehensive investigation of the link to discount rates reveals that aggregate earnings changes are tied to news about all components of the expected future stock market return, i.e., the real riskless rate, expected inflation, and the expected equity risk premium. Over the sample period studied, cash flow news and discount rate news in aggregate earnings changes covary positively and have offsetting impacts on stock market prices. As a result, stock market prices appear to be insensitive to aggregate earnings changes. The findings highlight the importance of separating cash flow news from discount rate news when evaluating the information content of accounting earnings at the stock market level. Overall, my study sheds new light on the informativeness and relevance of accounting earnings for valuation at the stock market level.


Accounting earnings Aggregate economy Cash flow news Discount rate news Stock market valuation 

JEL Classification

M41 E10 G10 



I wish to thank Peter Easton (editor) and two anonymous referees for their comments and suggestions. I also thank Bill Baber, Patricia Dechow, Sunil Dutta, Patricia Fairfield, Dimitrios Gikas, Prem Jain, Yaniv Konchitchki, Topseht Nonam, George Patatoukas, Stephen Penman, Andy Rose, Steve Tadelis, Jake Thomas, George Skiadopoulos, and seminar participants at the University of California at Berkeley, Athens University of Economics and Business, the University of Piraeus, Georgetown University, and the University of North Carolina/Duke 2012 Fall Camp for their comments. My thanks also to Thomas Stark from the Federal Reserve Bank of Philadelphia for his helpful discussions.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Haas School of BusinessUniversity of California, BerkeleyBerkeleyUSA

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