Nichols, James M Wahlen, D Craig; How Do Earnings Numbers Relate To Stock Returns A Review Of Classic Accounting Research With Updated Evidence Assignment

Questions

1. What are the two “bottom-line” performances ? Are these the only figures, that investors should worry about?

2. Theory linking Earnings to Stock Returns: What are the three assumptions about the information contained in earnings and share prices that the theory depends on?

3. First assumption: What constitutes link 1. How does the description in the text differ from Figure 1? Does what the authors say about operating income relevant for link 1

4. What is link 2? How will current and future earnings lead to something that shareholders value?

5. In link 3 what is assumed to create value to stockholders? How is capital gains treated here?

6. Look at the simple analogy. Is firm value equal to the present value of earnings or present value of dividends? Does this approach on the dividend payout ratio? What is the correct valuation model?

7. What anecdotal evidence is provided for why investors value earnings?

8. What is persistence in earnings ? In the example given, what is the response in stock price to $1 in persistent earnings versus transitory earnings?

9. Factor: earnings information. Why do the authors fear earnings numbers might not provide useful information to the capital markets?

10. What is the sample and the sample size? Is it the whole population?

11. Descriptive statistics (Table 1): Why do the mean and median differ by a large amount?

12. How are market capital, returns, abnormal returns, earnings, earnings changes defined? Do you see any problems?

13. If you merely know the sign of the change in earnings for the next year, how much return can you earn? How?

14. If you merely know the sign of the change in cash flows for the next year, how much return can you earn? If you had a choice between earnings and cash flows, what would you use?

15. If you use the sign and magnitude of earnings changes, how much abnormal return could you earn?

16. How is persistence related to abnormal returns for earnings increases? How is it measured?

17. To check: “Do Earnings Numbers Provide New Information to the Market?” Was is the study changed?

18. How much difference in market value did earnings surprise trigger around earnings announcement?

19. How do the authors measure “market efficiency with respect to earnings news”? Does the capital market anticipate the information in quarterly earnings announcements? How much was anticipated before earnings announcement?

20. While the market anticipates and reacts quickly to earnings information, is the reaction complete by earnings announcement? How much is the “post-earnings-announcement drift,”? What does it say towards market efficiency?