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

Journal Article (Review;Journal)

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.

Full Text

Duke Authors

Cited Authors

  • Francis, J; Schipper, K; Vincent, L

Published Date

  • March 1, 2003

Published In

Volume / Issue

  • 20 / 1

Start / End Page

  • 121 - 164

International Standard Serial Number (ISSN)

  • 0823-9150

Digital Object Identifier (DOI)

  • 10.1506/XVQV-NQ4A-08EX-FC8A

Citation Source

  • Scopus