The Relative and Incremental Explanatory Power of Earnings and Alternative (to Earnings) Performance Measures for Returns

Jennifer Francis*, Katherine Schipper, Linda Vincent

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

86 Scopus citations

Abstract

We analyze the ability of earnings and non-earnings performance metrics to explain the variability in annual stock returns for industries where we identify, ex ante, an allegedly preferred (for valuation purposes) summary performance metric. We identify three industries where earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash from operations (CFO) are preferred, and three industries where specific non-GAAP performance metrics are preferred. As a benchmark, we also examine the ability of EBITDA and CFO to explain returns for seven industries for which earnings is the preferred metric. Results for the benchmark earnings industries show that earnings dominates EBITDA and CFO in explaining returns. All other results are inconsistent with the view that perceptions of preferred metrics are reflected in actual aggregate investment behaviors.

Original languageEnglish (US)
Pages (from-to)121-164
Number of pages44
JournalContemporary Accounting Research
Volume20
Issue number1
DOIs
StatePublished - Mar 2003

Keywords

  • Cash flows
  • Earnings
  • Nonfinancial measures
  • Performance metrics

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'The Relative and Incremental Explanatory Power of Earnings and Alternative (to Earnings) Performance Measures for Returns'. Together they form a unique fingerprint.

Cite this