Earnings – returns relation in Greece: some evidence on the size effect and on the life-cycle hypothesis

The present paper examines the association between stock returns and accounting earnings for a sample of Greek firms listed on the Athens Stock Exchange (ASE) over the period from 01/1992 to 12/1999. In particular, the paper expands on the Easton and Harris (1991) model and tests whether deflated earnings and deflated changes in earnings contain information for contemporaneous stock returns. The paper also tests the hypothesis that the addition of further explanatory variables in the model, which account for size and for life-cycle stages, improves the information content of earnings for stock returns. Regressions are fitted separately for each year, and for all years pooled together. Test statistics are adjusted for heteroskedasticity using White's (1980) consistent covariance matrix. The results of the study indicate that the explanatory power of earnings for contemporaneous stock returns is very poor. Moreover, the Chow-Test displays a considerable instability over time of the returns/earnings relation. Improved information content is reported when the regressions are adjusted to account for size, supporting the hypothesis that firm-size is a strong factor in explaining the returns/earnings relation. However, the results are unable to sustain the hypothesis that the information content of earnings for stock returns differentiates according to the stage of the firm's life-cycle.