Economic Determinants of Price Informativeness about Future Earnings

Using the future earnings response coefficient (FERC) methodology, this study examines whether economic fundamentals are associated with cross-sectional variation in the informativeness of stock prices about future earnings. In contrast to previous FERC studies that focus on reporting properties, this study provides a more comprehensive overview of the return earnings relation by examining the economic determinants of FERCs. An analytical FERC model is derived that predicts that, under the price-leading-earnings condition, the FERC is positive and increases with the information content of future earnings. The empirical results show that product market concentration, product durability, growth opportunity, and conservatism are positively associated with FERCs, and that barriers to entry and recognition uncertainty are negatively associated with FERCs. These results suggest that operation and investment activities determine earnings timeliness in the pre-reporting stage.