The Impact of Arbitrage Costs on Intertemporal Changes in the Earnings Response Coefficient

10.6293/AQAFA.2010.08.12

David S. Jenkins；Uma Velury

ERC ； Arbitrage costs ； Noise trading Data used in this study were obtained from public sources

Advances in Quantitative Analysis of Finance and Accounting

8期（2010 / 06 / 01）

289 - 311

英文

In this paper, we present a market-based explanation to the documented decline in the value relevance of earnings. Specifically, we argue that an increase in arbitrage costs in the markets has arguably caused an increased departure of stock price from fundamental value and in turn a decline in the returns-earnings relation over time. We first test and document that the presence of arbitrage costs indeed dampens the returns-earnings relation. Next, we find that, consistent with prior research, there has been a decline in the Earnings Response Coefficient (ERC) over time, however, the decline is insignificant after controlling for arbitrage costs.

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