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Fundamental Information and Monetary Policy: The Implications for Earnings and Earnings Forecasts
Author(s) -
Dowen Richard J.
Publication year - 2001
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00382
Subject(s) - earnings , economics , predictability , earnings response coefficient , explanatory power , value (mathematics) , monetary policy , earnings per share , monetary economics , price–earnings ratio , financial economics , econometrics , accounting , mathematics , statistics , philosophy , epistemology
Building on the work of Lev and Thiagarajan (1993) and Abarbanell and Bushee (1997 and 1998) this paper tests whether market‐based information including dividend yield (Fama and French, 1998), firm size (Reinganum, 1981), and the ratio of book value to market value (Fama and French, 1992) add explanatory power to accounting data for predicting future earnings. The paper also tests whether earnings changes and the predictability of those changes are conditioned on monetary policy. It is found that the ratio of book value to market value is significantly related to earnings changes. Analyst forecast accuracy differs depending on monetary policy regime, but this difference is not due to differing interpretation of fundamental signals on financial statements appearing under differing monetary policy regimes. It is also found that there is a significant relation between monetary policy, earnings changes, and the level of signals concerning earnings changes.