Measuring the impact of sales on earnings and equity price
In this paper we examine how sales affect earnings and in turn the stock price using a model in which sales contribute to earnings by a fixed sales margin rate and the stock price responds more sensitively to sales-induced earnings than to non-sales-induced earnings. We report that the regression coefficient of the sales margin (2.54) is about three times the earnings response coefficient (0.85) for the full sample and can be as high as 19 times the earnings response coefficient for an industry (i.e., 11.95 vs. 0.62 for restaurants). We contribute to the literature by identifying and documenting factors that make separating out the sources of earnings more important in equity pricing.
KeywordsSales Earnings Equity price
Kim and Lim thank Robert H. Smith School of Business of University of Maryland and the Charles Tandy American Enterprise Center at TCU, respectively, for financial support.
- Barth M, Beaver W, Hand J, Landsman W (2005) Accruals, accounting-based valuation models, and the prediction of equity values. J Acc Audit Finan 20:311–345Google Scholar
- Lipe R (1990) The relation between stock returns and accounting earnings given alternative information. Acc Rev 65:49–71Google Scholar
- Ohlson J, Penman S (1992) Disaggregated accounting data as explanatory variables for returns. J Acc Audit Finan 7:553–573Google Scholar
- Pope P, Wang P (2005) Earnings components, accounting bias, and equity valuation. Rev Acc Stud 10:387–407Google Scholar
- Ramakrishnan R, Thomas J (1998) Valuation of permanent, transitory, and price-irrelevant components of reported earnings. J Acc Audit Finan 13:301–336Google Scholar
- Rees L, Sivaramakrishnan K (2004) The effect of meeting or beating revenue forecasts on the association between quarterly returns and earnings forecast errors. Working Paper. Texas A&M UniversityGoogle Scholar
- Wilson P (1987) The incremental information content of the accrual and funds components of earnings after controlling for earnings. Acc Rev 62:293–322Google Scholar