eThesis - Kauppakorkeakoulun sähköiset gradut

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PURPOSE OF THE STUDY:

Existing literature of valuation theories and financial statement analyses suggests that the change in earnings growth (earnings acceleration) conveys valuable information to investors. In my research, I study with a large sample of European middle and large market capitalization firms, whether earnings acceleration is useful in predicting stock returns, future earnings, and whether financial analysts appear to use this information in revising their forecasts. Besides extending geographically the study of Cao et al. (2011), I also contribute to the literature by studying whether the earnings acceleration information value derives from the operating cash flow or accruals component of earn-ings, whether the information value differs between the middle and large cap companies, and whether the results hold for both annual and quarterly earnings announcement data.

METHODOLOGY AND DATA:

My sample includes 387 large cap, and 1055 middle cap European developed country stocks from the years 1995-2012. The total sample size is 19 051 observations for the annual, and 23 596 obser-vations for the quarterly tests. My methodology is based on a large number of multivariate regres-sion equations, and the results are robust for various adjustments in the regression settings.

MAIN FINDINGS:

I find highly significant results supporting that the European stock earnings acceleration conveys valuable information similarly to that of prior U.S. literature. Hence, the earnings acceleration ex-plains long-window stock returns, future earnings, analyst forecast revisions, and contributes in-cremental information to the analyst long-term forecasts. Another significant finding is that the absolute majority of the earnings acceleration information value derives from the operating cash flow component of earnings, indicating that the market can differentiate between the real earnings increase and the increase of discretional accounting items. The information value does not appear to depend on the company size, and the quarterly earnings acceleration conveys similarly valuable and partially complementary information to the annual information. Overall, my study provides strong support for the use of horizontal financial statement analysis in assessing stock returns.