The association of aggregate and disaggregated earnings with annual stock returns

Abstract

Abstract This study compares aggregate earnings and disaggregated earnings (cash from operations, current accruals and non‐current accruals) in terms of their associations with stock returns. A cross‐sectional approach is adopted using Australian data over a six‐year period. This analysis is undertaken for two different models of the relation between earnings and returns: one model relating returns to the magnitude of earnings, and the other relating returns to the combination of levels of, and changes in, earnings. In each model, the disaggregated regression is generally a superior explanator of stock returns, implying that disaggregated earnings provides richer information about firm performance, in a purely statistical sense, than aggregate earnings. Thus, disaggregated earnings are more informative, even in the most simple of comparison modes, linear regression.

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