Association between earning acceleration and stock return

Earnings-based equity valuation models show that over finite forecast horizons, the price of a stock is a function of (a) expected earnings, (b) the expected earnings growth rate, and (c) the expected rate of return. In this study, we examine whether the current (realized) change in earnings growth, which we label “earnings acceleration,” is informative about future earnings and, consequently, affects stock prices. So, we aggregate data of 350 firm-year for future earnings model and 541 firm-year for return model from accepted firms in Tehran stock exchange witch were available. In order to examine the hypothesis of the study four regression models witch two models investigate relationship between earning acceleration (separated by positive and negative earning acceleration and six partition) and returns and two others investigate the association with future earnings according by using data panel method. The results of our study show that there are significant relationship between positive earning acceleration and stock return and also future earnings. But the evidences in the case of negative earning acceleration associated with future earning and return were not found. These findings can be used in choosing investment strategies and earnings prediction based on earning acceleration.