|Pe, Hong-ngai Jenkin
|The information content of security prices : Hong Kong evidence
|Stocks -- Prices -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department of Accountancy
|vi, 90, 202 leaves ; 30 cm
|This study examines the principal relationships between price and earnings and the informativeness of price in predicting future earnings. Furthermore, by how many periods do price lead earnings is also investigated. In addition, this paper address issue about the relative and incremental information content of price and earnings as well. The basis of current study is drawn from the theory that earnings process is seen to be a compound process having one component reflect events that also affect prices and the other one being simply a 'noise' that reflect events or adjustments on earnings having no effect on security prices. Relying on this revolutionary model on earnings (earnings was only seen to be a simple process having a time series properties in the past) and based on a set of valuation assumptions on securities, it can be empirically tested in the western security markets that price does reflect information about current as well as future earnings potential. Furthermore, as price reflects investor expectation or opinion about earnings, it is logical to predict that as soon as there are events that affect earnings in the future, it would be reflected in the price. Hence, it is proposed that current earnings can be related to past prices which reflect information on a more timely basis than do earnings. Therefore, it has been said that both prices and earnings do have information content in predicting future earnings. Studies in the past have also confirmed that price is a better factor than earnings in predicting future earnings because of its timeliness and richness nature in reflecting information set. It can be proved empirically in the thesis that the annual price of Hong Kong listed company is highly associated with current and future annual earnings. Hence price do have information content about current as well as future earnings. In addition, the study can successively demonstrate that past years' price at least leads earnings by one year up to two years. Again, past annual prices up to two years have information contents in predicting future earnings. Moreover, the current study can also prove that price has a higher relative explanatory power than earnings in predicting future earnings, hence price has a greater information content than earnings. Finally, the incremental information content of price over earnings is found to be higher than the vice versa.
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