The usefulness of earnings numbers in explaining stock returns in an emerging market: the case of Serbia

The relationship between accounting earnings and stock returns was subject of numerous studies over the past forty years. The first study of this relationship conducted by Ball and Brown in 1968 was the basis for many subsequent studies. Given the specific economic environment and less developed capital markets, these studies are relatively rare in transition economies. In the present study we investigate the relationship between accounting earnings and stock returns in a relatively underdeveloped Serbian capital market from 2006 to 2011. We use three regression specifications, namely the price, return and differenced model. The results suggest that earnings levels, both scaled and unsealed, have value relevancy on the Serbian capital market. We find no significant earnings response coefficients in various specifications of the differenced model. We also find evidence that stock prices lead accounting earnings and that negative earnings are more transitory than the positive earnings.