The Nonsynchronous Relation of Accounting Earnings with Stock Returns: Price Anticipation of Earnings and Earnings Anticipation of Price

The relation between stock return and accounting earnings is complex and is not synchronous. Accordingly, prices are useful for predicting accounting earnings and vice versa. This monograph explores the relation between stock market return and earnings with particular emphasis on the tendency of prices to anticipate earnings. The stock market has more timely sources of information than annual earnings and also interprets any accounting information it receives in the context of the other information it has available to it. This study examines the implications that price anticipation of earnings has for the return-earnings relation. It also identifies and empirically tests for the characteristics of firms whose earnings are anticipated to a greater or lesser degree by market prices. Consideration is also given to the tendency of earnings to anticipate prices. The study should be of interest to anyone who wishes to model the relation between stock return and accounting earnings and professionals who wish to identify firms where fundamental analysis is likely to be relatively more rewarding.