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Title: How do accounting variables explain stock price movements? theory and evidence
Authors: Chen, Peter
Zhang, Guochang
Keywords: Stock return
Accounting variables
Earnings yield
Profitability (ROE)
Capital investment
Growth opportunity
Issue Date: Jul-2007
Citation: Journal of Accounting and Economics, v. 43, iss. 2-3, June 2007, p. 219-244
Abstract: This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang (2000), who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and changes in profitability, growth opportunities and discount rates. Empirical results confirm the predicted roles of all identified factors. The model explains about 20% of the cross-sectional return variation, with cash-flow-related factors (as opposed to changes in discount rates) accounting for most of the explanatory power. The properties of the model are robust across various subsamples and periods.
Rights: Journal of Accounting and Economics © copyright (2007) Elsevier. The Journal's web site is located at
Appears in Collections:ACCT Journal/Magazine Articles

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