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How do accounting variables explain stock price movements? Theory and evidence

Authors Chen, Peter
Zhang, Guochang
Issue Date 2007
Source Journal of accounting & economics , v. 43, (2-3), 2007, JUL, p. 219-244
Summary This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang, G. [2000. Accounting information, capital investment decisions, and equity valuation: theory and empirical implications. Journal of Accounting Research 38, 271-295], 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. (c) 2007 Elsevier B.V. All rights reserved.
ISSN 0165-4101
Rights Journal of Accounting and Economics © copyright (2007) Elsevier. The Journal's web site is located at
Language English
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