Economic Determinants of the Price Informativeness on Future Earnings

Using the future earnings response coefficient (FERC) methodology, this study examines whether economic fundamentals are associated with the cross-sectional variation of the price informativeness on future earnings. In contrast to the prior FERC literature focusing on reporting properties, this study provides a more comprehensive framework of the returnearnings relation by examining economic determinants of FERCs. This study first derives an analytical FERC model that relates the recognition lag of earnings with an FERC under the price-leading-earnings situation. The analytical FERC model predicts that the FERC is positive and that the FERC increases with the information content of future earnings. Empirical results show that product market concentration, product durability, growth opportunity, and conservatism are positively associated with the FERC and that barriers to entry and recognition uncertainty are negatively associated with the FERC. These results suggest that operation and investment activities determine the earnings timeliness in the pre-reporting stage. JEL Classification: M41 (Accounting).