Catalin Starica (Université de Neuchâtel)

joint with Jan Marton

We empirically identify the shape of the relationship between stock prices and earnings. We use the inferred functional relation to validate predictions of competing theoretical models relating earnings to prices: Ohlson (1995), Burgstahler and Dichev (1997), Fischer and Verrecchia (1997), Zhang (2000), and Hiemann (2020). Our findings lend support to the dynamic real options model in Hiemann (2020), which predicts that the relationship between earnings and prices is non-linear, non-monotonic, and piece-wise concave (decreasing and concave for negative earnings, increasing linear for moderate earnings, and concave for large positive earnings).

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