The persistence of earnings per share

• Published in: Review of quantitative finance and accounting Vol. 31; no. 4; pp. 425 - 439
• Main Authors: Gil-Alana, Luis A., Peláez, Rolando F.
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.11.2008; Springer Nature B.V
• Subjects: Accounting procedures; Accounting/Auditing; Business cycles; Corporate Finance; Discount rates; Dividends; Earnings; Earnings per share; Econometrics; Economics and Finance; Equity; Exchange traded funds; Finance; Index funds; Innovations; Investments; Investors; Mathematical models; Operations Research/Decision Theory; Original Research; Present value; Prices; Securities markets; Specification; Statistical analysis; Stock exchanges; Stock prices; Studies; Valuation; Persistence; Fractional integration; C010; G100; C140; Earnings per share
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-007-0077-0

The persistence of innovations to accounting earnings per share, EPS, has important implications for equity valuation, yet it remains a largely neglected subject. This paper employs various empirical tests in order to measure the persistence of shocks to EPS for the S&P 500 index. Within the I (0)/ I (1) paradigm the empirical evidence rejects the I (1) specification, supporting instead a trend-stationary representation. When fractional orders of integration are considered, the results indicate that the detrended series is long memory ( d  >  0) and mean reverting ( d  < 1). The responses decay slowly to zero, albeit 50 quarters after an initial shock the responses remain significantly different from zero. Likewise, the variance ratio evidence suggests that the effect of a shock persists over time spans characteristic of the business cycle.