Long term relationship and causality between earnings and stock prices: Latin America evidences

  • Fernando Caio Galdi Fucape Business School
  • Alexsandro Broedel Lopes Universidade de São Paulo; Faculdade de Economia, Administração e Contabilidade; Departamento de Contabilidade e Atuária
Keywords: capital markets and accounting, Granger causality, cointegration, international accounting, Latin America

Abstract

This paper analyses if there is long term relationship and causality between accounting earnings and stock prices of Latin American firms. Cointegration tests are used in the same approach as Campbell e Shiller (1987) that investigated present value models based on rational expectations for the equity and bond markets. Essentially, if the variables are cointegrated, they have a long run relationship. This relation has been extensively studied for macroeconomic variables, but few works explore this issue for accounting and financial variables in emerging markets. Additionally the Granger causality between accounting earnings and stock prices are analyzed. Evidences points out that earnings and prices do have a long run relationship. However a causation relation can not be established for those variables. These findings can be explained by earnings timeliness (specially in Code Law countries) related by Ball, Kothari and Robin (2000), Collins et al. (1994) and Beaver, Lambert and Morse (1980). Additionally the evidences indicate that Argentine accounting earnings, that have less orthodox features than other Latin American countries, are typically stationary and have a higher degree of causality relation with stock prices than other Latin American countries accounting earnings.

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Published
2008-06-01
How to Cite
Galdi, F., & Lopes, A. (2008). Long term relationship and causality between earnings and stock prices: Latin America evidences. Revista De Administração, 43(2), 186-201. https://doi.org/10.1590/S0080-21072008000200006
Section
Finance & Accounting