Earnings Disaggregation and Market Efficiency

52 Pages Posted: 2 Dec 2020

See all articles by Miaodi Han

Miaodi Han

University of New South Wales (UNSW)

Andrew B. Jackson

UNSW Australia Business School, School of Accounting

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

Date Written: October 14, 2020

Abstract

Using the earnings disaggregation model in Jackson, Plumlee and Rountree (2018), we investigate investors’ incorporation of the market, industry and firm-idiosyncratic components of earnings in their stock pricing decisions. We find results consistent with Jackson et al. (2018), showing the firm-idiosyncratic component of earnings is less persistent than the other two earnings components. However, we find that investors fail to correctly react to the actual persistence of the market and firm-idiosyncratic components of earnings as reflected in their stock pricing behavior. Investors are found to underweight the market and firm-idiosyncratic components of earnings but do not incorrectly weight the industry component of earnings. Correspondingly, we find that significant positive abnormal returns can be earned by taking a long (short) position in firms with higher (lower) levels of firm-idiosyncratic earnings consistent with the firm-idiosyncratic earnings component containing higher information uncertainty.

Keywords: Macroeconomy, Market, Industry, Profitability, Efficiency, Pricing

JEL Classification: M41

Suggested Citation

Han, Miaodi and Jackson, Andrew B. and Monroe, Gary S., Earnings Disaggregation and Market Efficiency (October 14, 2020). Available at SSRN: https://ssrn.com/abstract=3711802 or http://dx.doi.org/10.2139/ssrn.3711802

Miaodi Han

University of New South Wales (UNSW) ( email )

High Street
Kensington
2052
Australia

Andrew B. Jackson (Contact Author)

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

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