Earnings Innovations, Earnings Persistence, and Stock Returns

This study designs and implements new tests of the information contained in accounting earnings. The authors examine whether the magnitude of the effect of unexpected earnings on stock returns is (positively) correlated with the presen t value of revisions in expected future earnings derived from a univa riate time-series model. By addressing the valuation implications of the time-series properties of earnings, they uncover a new dimension to the information content of earnings and, in the process, find no e vidence that the reactions of stock returns to unexpected earnings ar e excessively volatile.