This study proposes the return-earnings covariance as a proxy for the usefulness of earnings inferred from the absolute magnitude of price changes associated with earnings information. It is argued that such measurement of the absolute usefulness of earnings information has been neglected in existing long-window studies. For example, the ERC and R² measure the marginal impact and the relative impact of earnings information on the stock price, respectively. It is demonstrated that the return-earnings covariance is a close proxy for the absolute magnitude of price change which is free from noise in both return and earnings. Thus, the return-earnings covariance…
Author: Cho, Myojung
Source: University of Maryland
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