Earnings as an Explanatory Variable for Returns
Coauthor(s): Peter D. Easton.
In this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings/returns associations. The primary model motivating this research relies on the idea that book value (owners' equity) and market value are both "stock" variables indicating the wealth of the firm's equity holders. The related "flow" variables (after adjusting for dividends) are, respectively, earnings divided by price at the beginning of the return period (A/P-1) and market returns. It then follows that earnings divided by beginning of period price should be associated with stock returns
Source: Journal of Accounting Research
Easton, Peter D., and Trevor Harris. "Earnings as an Explanatory Variable for Returns." Journal of Accounting Research 29, no. 1 (Spring 1991): 19-36.