Relationship between Earning Growth and Stock Returns by Using Residual Income in Tehran Stock Exchange (TSE)

Normal 0 false false false EN-US X-NONE FA MicrosoftInternetExplorer4The main objective of this study is to explore the relationship between earnings growth and stock returns using the residual income (RI) model in companies listed on the Tehran Stock Exchange. We use residual income (RI) for decomposing earnings growth into growth in RI and growth in invested capital in order to explain its relationship with current and future stock returns. Data were collected for the period 2004 to 2011 from TSE. We use Pearson correlation coefficient to test our hypotheses. The results show، significant positive relationship between growth in RI and current stock returns and significant negative relationship between growth in invested capital and current stock returns. Also، there is a significant positive relationship between growth in RI and future stock returns، and there is no relationship between growth in invested capital and future returns.