This study examines the ability of fundamental summary measure Pr to predict earnings change for the subsequent year, the association of Pr and stock returns, and the relationship between Pr and risk factors beta and size. Pr is a probability index generated by logistic model and financial statement data. Beta effect is minimized by grouping firms into beta portfolios while size is controlled through incorporating size as an independent variable in the regression models. Evidence from the study indicates that Pr has a strong ability to predict future earnings change and has a positive and significant association with adjusted market returns, after controlling for beta. Pr's association with adjusted market returns is mitigated when beta and size are controlled simultaneously.
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1 January 2003
This article was originally published in
International Journal of Commerce and Management
