Earnings Innovations, Earnings Persistence, and Stock Returns

This study designs and implements new tests of the information contained in accounting earnings. We examine whether the magnitude of the effect of unexpected earnings on stock returns is (positively) correlated with the present value of revisions in expected future earnings derived from a univariate time-series model. By addressing the valuation implications of the time-series properties of earnings, we uncover a new dimension to the information content of earnings and, in the process, find no evidence that the reactions of stock returns to unexpected earnings are excessively volatile.