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Autoregressive Modeling of Earnings‐Investment Causality
Author(s) -
BARYOSEF SASSON,
CALLEN JEFFREY L.,
LIVNAT JOSHUA
Publication year - 1987
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1987.tb02547.x
Subject(s) - earnings , bivariate analysis , univariate , econometrics , causality (physics) , economics , granger causality , autoregressive model , investment (military) , empirical research , autoregressive integrated moving average , earnings response coefficient , financial economics , time series , multivariate statistics , accounting , statistics , mathematics , physics , quantum mechanics , politics , political science , law
The purpose of this paper is to empirically test the relationships between corporate earnings and investment. In particular, the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone. Similarly, it investigates whether knowledge of past earnings improves the prediction of future investments beyond knowledge of past investments alone. This is the empirical definition of Granger causality. The empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investments but not in predicting future earnings.