Advertisement

Annals of Operations Research

, Volume 45, Issue 1, pp 319–332 | Cite as

Dynamic linkages between stock prices, accrual earnings and cash flows: a cointegration analysis

  • Teppo Martikainen
  • Vesa Puttonen
Article
  • 141 Downloads

Abstract

This paper investigates the dynamic linkages between stock market prices, accrual earnings and cash flows using Finnish data. We find that stock returns lead accounting returns rather than vice versa. Thus, the thin Finnish stock market appears to produce important information about the future success of Finnish companies for decision making purposes. In addition, the cointegration analysis performed here indicates that the inclusion of the so-called error correction term based on non-stationary price variables significantly improves the observed association between stock market and accounting variables. Thus, in future research, the long-term adjustment between stock market and accounting variables should be analysed more carefully when investigating the causality between accounting earnings and stock markets.

Keywords

Stock Market Cash Flow Error Correction Stock Return Stock Prex 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. [1]
    E. Artto, Comparison of the competitive capacity of Finnish, Swedish and West German metal industry enterprises 1971–1978, Zeits. Betriebwirtschaft 52 (1982) 754–765.Google Scholar
  2. [2]
    R. Ball and P. Brown, An empirical evaluation of accounting income numbers, J. Accounting Res. 6 (1968) 159–178.Google Scholar
  3. [3]
    W.H. Beaver and R. Dukes, Interperiod tax allocation, earnings expectations, and the behavior of stock prices, Accounting Rev. 47 (1972) 320–332.Google Scholar
  4. [4]
    W.H. Beaver, R. Lambert and D. Morse, The information content of security prices, J. Accounting Econ. 2 (1980) 3–28.Google Scholar
  5. [5]
    W.H. Beaver, R. Lambert and S.G. Ryan, The information content of security prices. A second look, J. Accounting Econ. 9 (1987) 139–158.Google Scholar
  6. [6]
    T. Berglund, B. Wahlroos and L. Grandell, The KOP and UNITAS indexes for the Helsinki Stock Exchange in the light of value weighted index, Finnish J. Bus. Econ. 32 (1983) 30–41.Google Scholar
  7. [7]
    V.L. Bernard and T.L. Stober, The nature and amount of information in cash flows and accruals, Accounting Rev. 64 (1989) 624–652.Google Scholar
  8. [8]
    J.L.G. Board and J.F.S. Day, The information content of cash flow figures, Accounting Bus. Res. 20 (1989) 3–11.Google Scholar
  9. [9]
    R.M. Bowen, D. Burgstahler and L.A. Daley, Evidence on the relationships between earnings and various measures of cash flow, Accounting Rev. 61 (1986) 713–725.Google Scholar
  10. [10]
    R.M. Bowen, D. Burgstahler and L.A. Daley, The incremental information content of accrual versus cash flows, Accounting Rev. 62 (1987) 723–747.Google Scholar
  11. [11]
    D.W. Collins, S.P. Kothari and J.D. Rayburn, Firm size and the information content of earnings with respect to earnings, J. Accounting Econ. 9 (1987) 111–138.Google Scholar
  12. [12]
    P.D. Easton, T.S. Harris and J.A. Ohlson, Accounting earnings can explain most of security returns: The case of long return intervals, J. Accounting Econ. 15 (1992) 119–142.Google Scholar
  13. [13]
    R.F. Engle and C.W.J. Granger, Co-integration and an error correction: Representation, estimation and testing, Econometrica 55 (1987) 251–276.Google Scholar
  14. [14]
    C.W.J. Granger, Investigating causal relations by econometric models and cross spectral methods, Econometrica 37 (1969) 424–438.Google Scholar
  15. [15]
    C.W.J. Granger, Some properties of time-series data and their use in econometric model specification, J. Econ. (1981) 121–130.Google Scholar
  16. [16]
    W. Harmon, Earnings versus funds flows. An empirical investigation of market reaction, J. Accounting, Auditing Fin. 6 (1984) 24–34.Google Scholar
  17. [17]
    J. Kinnunen and E. Artto, The controversial relationship between accrual income and cash flows: Some evidence from Finnish firms, Helsinki School of Economics, Working Paper F-224 (1989).Google Scholar
  18. [18]
    J. Kinnunen and E. Artto, The dependence of future cash flow on current accrual income and cash flow, Zeits. Betriebwirtschaft 62 (1992) 685–706.Google Scholar
  19. [19]
    A. Korhonen, Accounting income numbers, information and stock prices: a test of market efficiency, Finnish J. Bus. Econ. 24 (1975) 306–322.Google Scholar
  20. [20]
    S.P. Kothari, Price-earnings regressions in the presence of prices leading earnings, J. Accounting Econ. 15 (1992) 173–302.Google Scholar
  21. [21]
    S.P. Kothari and R.C. Sloan, Information in prices about future earnings, J. Accounting Econ. 15 (1992) 143–171.Google Scholar
  22. [22]
    B. Lev and J.A. Ohlson, Market-based empirical research in accounting: a review, interpretation and extension, Suppl. J. Accounting Res. 20 (1982) 249–322.Google Scholar
  23. [23]
    J. MacKinnon, Critical values for cointegration tests, in:Modelling Long Run Economic Relationships, eds. R. Engle and C.W.J. Granger (Oxford University Press, 1990).Google Scholar
  24. [24]
    M. Malkamäki, T. Martikainen and J. Perttunen, On the riskiness of the world's stock markets, Euro. J. Oper. Res. 53 (1991) 288–296.Google Scholar
  25. [25]
    T. Martikainen, T. Ankelo and R. Ruuhela, On the association between stock returns and corporate earnings adjusted for alternative depreciation methods. Empirical evidence on Finnish data, Finnish J. Bus. Econ. 39 (1990) 109–127.Google Scholar
  26. [26]
    T. Martikainen, On the significance of the economic determinants of systematic risk. Empirical evidence with Finnish data, Appl. Fin. Econ. 1 (1991) 97–104.Google Scholar
  27. [27]
    T. Martikainen, Stock returns and classification pattern of firm-specific financial variables. Empirical evidence with Finnish data, J. Bus. Fin. Accounting 20 (1993) 537–557.Google Scholar
  28. [28]
    T. Martikainen, T. Rothovius and P. Yli-Olli, On the individual and incremental information content of accrual earnings, cash flows and cash dividends in the Finnish stock market, Euro. J. Oper. Res. 68 (1993) 318–333.Google Scholar
  29. [29]
    J. Muth, Rational expectations and the theory of price movements, Econometrica (July 1961) 315–335.Google Scholar
  30. [30]
    J. O'Hanlon, The relationship in time between annual accounting returns and annual stock market returns in the UK, J. Bus. Fin. Accounting 18 (1991) 305–314.Google Scholar
  31. [31]
    I. Virtanen and P. Yli-Olli, Forecasting stock market prices in a thin security market, Omega 15 (1987) 145–155.Google Scholar
  32. [32]
    T.D. Warfield and J.J. Wild, Accounting recognition and the relevance of earnings as an explanatory variable for returns, Accounting Rev. 67 (1992) 821–842.Google Scholar
  33. [33]
    Yritystutkimusneuvottelukunta, Yritystutkimuksen analyysimenetelmät. Jyväskylä (Finnish Credit Analysis Commission: Financial ratio analysis) (1983).Google Scholar
  34. [34]
    R. Östermark, Predictability of Finnish and Swedish stock returns, Omega 17 (1989) 223–236.Google Scholar

Copyright information

© J.C. Baltzer AG, Science Publishers 1993

Authors and Affiliations

  • Teppo Martikainen
    • 1
  • Vesa Puttonen
    • 2
  1. 1.Faculty of Accounting and Industrial ManagementUniversity of VaasaVaasaFinland
  2. 2.Helsinki School of Economics and Business AdministrationHelsinkiFinland

Personalised recommendations