The Adjusted Earnings Yield
Posted: 27 Sep 2007
The earnings yield, determined by the ratio of reported earnings to price, is frequently used to predict real return. Complications characterize the predictions, however, because reported earnings are not real. This research identifies an adjusted earnings yield that ensures that real return can be determined as a ratio of current-period prices. From freely accessible and publicly disseminated data, an adjusted-earnings-yield series is created for the U.S. equity market. Statistical tests indicate that this measure is a much better predictor of future real returns than are other popular valuation measures.
Keywords: Equity Investments, Fundamental Analysis and Valuation Models, Financial Statement Analysis, Financial and Ratio Analysis
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