Financial Statement Information and the Pricing of Earnings Changes

Research was conducted to investigate the value implications of the changes in annual earnings. It was assumed that a relationship exists between the persistence of earnings and the changes in stock prices associated with reported earnings innovations. The study yielded three major findings. Results showed that other data contained in annual financial statements can be used to evaluate pricing multipliers. Findings also revealed the variability of the persistence of earnings and the pricing multipliers indicated by financial statements. Finally, an association was found between the multiplier of earnings changes and the information contained in the financial statements published in the previous year.