Jurnal Pak Sumi Cuy

Sumiyana etal.
AccountingFundamentalsandthe VariationofStock Price

Gadjah Mada International Journal of Business
MayAugust2010,Vol.12,No.2,pp.189229
ACCOUNTING FUNDAMENTALS AND

THE VARIATION OF STOCK PRICE
Factoring in the Investment Scalability*
Sumiyana
Zaki Baridwan
Slamet Sugiri
Jogiyanto Hartono M.
All of authors are from Faculty of Economics and Business, Universitas Gadjah Mada
This study develops a new return model with respect to

accounting fundamentals. The new return model is based on
Chen and Zhang (2007). This study takes into account the
investment scalability information. Specifically, this study splits
the scale of firms operations into short-run and long-run
investment scalabilities. We document that five accounting fundamentals explain the variation of annual stock return. The
factors, comprised book value, earnings yield, short-run and
long-run investment scalabilities, and growth opportunities, coassociate positively with stock price. The remaining factor,
which is the pure interest rate, is negatively related to annual
stock return. This study finds that inducing short-run and longrun investment scalabilities into the model could improve the
*ThismanuscriptispartofmydissertationtitledAssociationbetweenAccountingInformation
andStockPriceVariation:InducingInvestmentScalabilityandForwardLookingInformationwith
Zaki Baridwan(promoter), SlametSugiri andJogiyantoHartono M.(copromoters),Suwardjono,
MuhammadSyafruddin,Supriyadi,AinunNaimandBambangRiyantoL.S.(BoardofExaminers).
IamindebtedtoalltheaforementionednamesandtoalldoctoralstudentsattheFacultyofEconomics
andBusiness,UniversitasGadjah Mada, who have contributed to thisresearch.
189
Gadjah Mada International Journal of Business, May-August 2010, Vol. 12, No. 2
degree of association. In other words, they have value relevance. Finally, this study suggests that basic trading strategies
will improve if investors revert to the accounting fundamentals.
Keywords:accountingfundamentals;bookvalue;earningsyield;growthopportuni
ties; shortrun and longrun investment scalabilities; trading strategy;
valuerelevance
JEL Classification: M41(accounting);G12(assets pricing; interest rate);G14(information and
market efficiency);G15(international financial markets)
Introduction
Chen and Zhang (2007) present
thelatestreturnmodelthatrelatesthe
fundamentalfirmvaluetothevariation
instockprice.Theyalsoprovidetheo
reticalandempiricalevidencethatstock
returnisafunctionofaccountingvari
ables, namely earnings yield, equity
capital, the change in profitability,
growthopportunities,anddiscountrate.
ChenandZhang(2007)arguethatfirm
valueembracesinformationonpoten
tialfutureassetsandgrowthopportuni
ties. This argument is supported by
MillerandModigliani(1961).Inasimple
explanation,bothstudiesinferthatstock
priceisafunctionoffutureassetsor
capitalscalability.1Earningscouldbe
determinedbytheadaptationconcept
whenthefirmsinvestedresourcesare
modifiabletogeneratefutureearnings
(Wright1967).
The association between stock
returnandfundamentalfirmvaluehas
been examined by Burgstahler and

Dichev(1997)andCollinsetal.(1999).
Theysuggestthatearningsyieldhasa
concavenonlinearassociation,thereby
notpurelylinear. Otherstudiesshow
otherwise, an inverse relationship of
earnings and bookvalueof equityto
stockpriceorreturn(JanandOu1995,
andCollinsetal.1999).Theinconsis
tent relationship between stock price
andaccountingfundamentalshasbeen
overviewedbyLev(1989),LoandLys
(2000),andKothari(2001).Thosere
searchersarguethatthisinconsistency
isdueto:(1)aweakrelationshipbe
tween earnings and stock price vari
ability,markedbyR2lessthan10 percent(ChenandZhang2007),and(2)a
linearcorrelationbetweenaccounting
information and future related cash
flows,withequityvalueasafunctionof
scalability and profitability (Ohlson
1995;FelthamandOhlson1995,1996;
Zhang 2003; and Chen and Zhang
2007).
Scalabilityisactuallyafirmsscaleofoperations.Thisstudyshortensitintoscalability.Itrefers
tothemeasureofincreasingordecreasingscaleofoperationsinaratioorproportion.Inthisstudy,
the ratios denominator is the previous years assets.
190
Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price
This study is mainly focused on

designinganewreturnmodelandex
amining the model. Previous studies
clearlyshowapositiveassociationbe
tweenaccountingdataandreturnbased
on four related cash flows, namely
earningsyield,equitycapital,profitabil
ity, and growth opportunities, and a
negativerelationshipwiththecostsof
debtandequitycapital(Zhang2003,
and Chen and Zhang 2007). Since
previous models haveyet tocompre
hensively explain the role of equity
capital,thisrecentlydesignedmodelis
aimedatenhancingtheidentificationof
initialfactorscausingtheequitycapital
scalabilitytorise,whetheritisshort
runorlongruninvestmentscalability
according to financial management
concepts(Smith1973).
Hatsopoulus(1986)supportsthe
investmentscalabilityargument,sug
gestingthat thestrengthof firmpro
ductivity is associated with earnings
andstockprice.Drucker(1986)also
concludes that production scalability
affectsnotonlytheearningspowerbut
also the firms market value. Other
empirical studies have confirmed the
followings:(1)thepositiveassociation
betweenassetsproductivityandequity
value(Kaplan1983),(2)theefficient
productivityshownbylowcostassets
usage to increase the firms equity
(Dogramaci1981;Kendrick1984),(3)
the cheapresource inputs to ensure
future growth of the firm (Kendrick
1984), (4) the enhancement of firm
productivitytoimprovethefirmseq
uityvalueandstockholderwealth(Bao
andBao1989),and(5)thenonearn
ingsnumbersasanadditionalpredic
tivevalue,whichiscalledthevaluation
link(Ou1990).
This complementaryanalysis re
liesonthefollowingreasons.First,the
limitation of Ohlsons (1995) model
(FelthamandOhlson1995,1996).This
weaknessliesinitsassumptionsthat:
(i)futureearningscouldbedetermined
using consecutive previous earnings
and (ii) earnings could be predeter
mined stochastically. Second, earn
ings is a noise when measuring eco
nomicearningsandequityvalue(Kolev
etal.2008;Collinsetal.1997;Givoly
and Hayn 2000; and Bradshaw and
Sloan2002).Third,highvalueisrel
evant when eliminating earnings
(Bradshaw and Sloan 2002; and
Bhattacharyaetal.2003).Therefore,
this study provides complementary
measurement of earnings. Addition
ally,thisstudyisfocusedontheadap
tation theory in which assets on the
statement of financial position are a
determinant of equity value
(BurgstahlerandDichev1977).
Ourmainresearchobjectiveisto
design a new return model. It also
examinesthedegreeofassociationin
this model. Not only does this new
return model associate stock return
with four cashflowrelated factors,
namely earnings (Easton and Harris
1991; Burgstahler and Dichev 1997;
Collinsetal.1999),equitycapital(Jan
andOu1995,andCollinsetal.1999),
profitabilityandgrowthopportunities
(Ohlson 1995; Feltham and Ohlson
1995,1996;Zhang2003,andChenand
Zhang2007),anddiscountrate(Zhang
191
2003,andChenandZhang2007),butit
alsoinvestigatesfurtherbyfactoringin
theshortrunandlongruninvestment
scalabilities.Thisstudyexaminesthe
new theoretical return model using
empirical data. Furthermore, robust
nesschecksareconductedtoconfirm
theconsistencybetweenthenewmodel
anditspredecessors,includingtheas
sociationbetweeneachconstructand
stockreturn.
Thisstudybenefitsbothinvestors
and managers. From the investors
pointofview,thisstudyprovidesmore
comprehensive,realistic,andaccurate
parametersforpredictingpotentialfu
ture cash flows since the new model
extractsmoreinformationthandocur
rently available models. From the
managers point of view, this study
gives incentives to managers to dis
close more information publicly as
mandatedbySFACNo.5,paragraph
24(FASB1984).Finally,thenewre
turnmodelcanleadinvestorsandman
agement to assess comprehensively
theinformationconveyedinfinancial
statements.
Thisstudycontributestoaccount
ingliteraturebyprovidingmorecom
pleteandrealisticreturnmodel. This
study has advantages compared with
themodelsofEastonandHarris(1991),
LiuandThomas(2000),Zhang(2003),
Copelandetal.(2004),ChenandZhang
(2007), and Weiss et al. (2008), ex
plainedasfollows.First,thismodelis
morecomprehensiveduetoitsbroader
coverage,specificallytheinclusionof
assets scalability to generate future
cash flows.
192
Second,byincludingscalability,
thismodelisexpectedtobecloserto
the economic reality as firms should
reasonably choose future investment
projectsthatwillcontributepositivenet
cash inflow. Cash inflow magnifies
earningsanditsvariability.Thesecond
advantage is labeled as the earnings
capitalizationmodelbyOhlson(1995),
whoexplainsthatearningsanditsvari
abilityareaffectedbycurrentprojects.
Third,thenewreturnmodelcre
atesamorecomprehensiveandaccu
ratepredictoroffuturecashflowsto
estimate potential future earnings by
extracting multiple relevant informa
tion(Liuetal.2001).Multipleinforma
tioncouldimprovemodelaccuracyas
long as it is aligned with increasing
valuerelevance.Eventually,thisstudy
offers considerable contribution by
improvingthedegreeofassociationof
returnmodelasitismorecomprehen
sive,realistic,andaccurate.Thiscon
tributionisreflectedbyhigherR2and
adj-R2thanthepreviousmodels.
This study assumes that, firstly,
the association between accounting
fundamentalsandstockpricevariabil
ityislinear.Accountinginformationis
positivelyproportionaltoearningsyield,
investedequitycapital,profitability,and
growthopportunities,andisnegatively
proportionaltodiscountrate.Secondly,
investors payattention to accounting
information comprehensively, mean
ingthatinvestorsuseaccountingfun
damentalsforbusinessdecisionmak
ing. Thirdly, investors comprehend a
firmsprospectbasednotonlyoneq
uitycapitalanditsgrowth,butalsoon
assets as the stimulus for increasing

thefirmsequityvalue.Thisrefersto
theadaptationtheory(Wright 1967).
Fourthly,theefficiencyformofstock
marketiscomparable.Stockpricevari
abilityonallstockmarketsactsinthe
same marketwide regime behavior,
anddependssolemnlyonearningsand
book value (Ho and Sequeira 2007).
Fifthly, cost of equity capital repre
sents the opportunity cost for each
firm. It suggests that every fund is
managedinordertomaximizeassets
usabilityandthatmanagementalways
behavesrationally.
Literature Review, Models

and Hypotheses Development
Earnings Yield and Stock Value
Ohlson (1995) reveals that firm
equity comes from book value and
futureresidualvalue.Firmvaluecan
be calculated from current, potential
discount rate which is unrelated to
current accounting net capital eco
nomic assets. If a firm creates new
wealthvaluefrominvestedassets,the
newwealthvalueis concludedinthe
firms net equity capital. Hence, this
netvalueisreflectedinthefirmsstock
price.
Ohlsons (1995) model suggests
linear information dynamics of book
value and expected residual value in
associationwithstockprice.Thismodel
was then followed by a myriad of
furtherstudies.LoandLys(2000),and
Myers(1999)implementedthelinear
information dynamics model for the
first time, which is afterwards re

nowned as the clean surplus theory.
Thistheoryarguesthatyearendstock
priceistheresultofbeginningofthe
yearstockpriceaddedbycurrentearn
ings and subtracted by current divi
dends paid. Meanwhile, Lundholm
(1995) finds that the firms market
value is the sum of invested equity
capitalanditsfutureresidualearnings
discountedbythecostofinvestedcapi
tal.
Other research has consistently
utilizedOhlsons(1995)modelwithout
criticizingthestockvalueandearnings
withinthemodel.FelthamandOhlson
(1995;1996)emphasizethattheasso
ciationbetweenstockvalueandearn
ingsisasymptotic.Thisrelationmaybe
affectedbyotherinformationandac
countingconservatismindepreciation.
Burgstahler and Dichev (1997) used
the same model, and introduced the
bookvaluesofassetsanddebttobetter
explain firm value. Liu and Thomas
(2000) and Liu et al. (2001) added
multiplefactors,bothearningsdisag
gregating and other measures related
to book value and earnings, into the
cleansurplusmodel.
Collins et al. (1997), Lev and
Zarowin (1999), and Francis and
Schipper(1999)figureouttheassocia
tion validity that the value relevance
betweenbookvalueandearningsand
stock market value could be main
tained.AbarbanellandBushee(1997)
andPenmann(1998)specificallysug
gest that accounting information sig
nals can improvethedegree ofasso
ciation.Bothstudiescontendthatearn
193
ings qualityimproves returnassocia

tion.Collinsetal.(1999)declaresimi
larconclusion,andenhancetheasso
ciationbyeliminatingfirmswithnega
tiveearnings.
Prior to Ohlsons (1995) model,
research in the past had associated
bookvalueandearningswiththefirms
market value. Rao and Litzenberger
(1971)andLitzenbergerandRao(1972)
provideevidencethatthefirmsmar
ket valueis afunctionofbookvalue
andearningsalthoughtherelationmight
beadjustedbythefunctionsofdebtand
productivity growth. Bao and Bao
(1989)specificallyindicatethatequity
is not only affected by earnings, but
also by expected earnings, standard
deviation of earnings, and earnings
growth.
Investment Scalability
The first limitation of Ohlsons
(1995)modelliesinits assumptions.
Continued by Feltham and Ohlson
(1995;1996),itstillassumesthatfuture
earningsisdeterminedbyconsecutive
previousearnings.However,investors
mayhavedifferentinsightsbyobserv
ing future potential earnings.
BurgstahlerandDichev(1977)clearly
revealthatequityvalueisnotaffected
bypreviousearningsonly,butcouldbe
determinedbytheadaptationtheory,2
which is the firms invested capital
whenitsresourcesaremodifiablefor
otherutilizations.Furthermore,theother
2
utilizationsmaygeneratefuturepoten
tialearnings.Thisconceptisbasedon
Wright (1967), who argues that the
adaptation value is derived from the
role of financial information on the
balance sheet, and the role primarily
comes from assets.
The second limitationofOhlsons
model(Ohlson1995;andFelthamand
Ohlson1995,1996)liesinitsearnings
assumption.Earningsisassumedtobe
predetermined stochastically. This
concept is based on Sterling (1968),
assumingthat firms areinstationary
condition.Theconceptbasicallypostu
lates that afirmcontinues tooperate
basedonitspaststrengthandperfor
mance.Infact,thefirmsstrengthand
performancemaychangeduetotech
nology,mergerandacquisition,take
over,liquidation,bankruptcy,restruc
turing,managementturnover,andnew
investedcapital.
Ohlson(1995;2001)himselfad
mitted to the limitations, citing that
therewasotherinformationnotedasa
mysterious variable. This variable
makesthestockmarketsfailtoreflect
bookvalue,orlessenstheinformation
content. Further research has been
attempting to replace the mysterious
variable(e.g.,Beaver1999;Hand2001),
althoughbothofthosestudiesaremerely
aninterpretativecommentaryorevalu
ativereviewoftheOhlsonsmodel.
Later research has left Ohlsons
conceptandtriedtocomplementitwith
Apart of the adaptation theory, another approach to determining firm equity value is the
recursiontheory.Usingtherecursionapproach,equityvalueisadiscountedfutureexpectedearnings
underthe assumption that thefirm merely applies currentbusiness technology into thefuture.
194
other empirical models. Francis and

Schipper (1999) have abandoned
Ohlsonslinearinformationdynamics
by adding assets and debt into the
return model. This addition has em
barkedonmeasuringassetsscalability
ineitherlongorshortrun.Abarbanell
andBushee(1997)modifiedthereturn
modelbyaddingfundamentalsignals,
and their changes consist of invento
ries, accounts receivable, capital ex
penditures, gross profit, and taxes.
These fundamental signals represent
investment scalability fromassets on
thestatementoffinancialposition.
Bradshawetal. (2006)modified
Ohlsonsreturnmodelbyinducingthe
magnitudeoffinancingobtainedfrom
debt. This change in debt is compa
rabletothechangeinassetsutilizedto
generate earnings. Cohen and Lys
(2006) improved the model by
Bradshawetal.(2006)byinducingnot
only the change in debt but also the
change in shortrun investment
scalability,whichisthechangeinin
ventories. Heretofore, longrun and
shortruninvestmentscalabilitieshave
been put into consideration. Mean
while, Weisset al.(2008)emphasize
the shortrun investment scalability,
which are the changes in inventories
andaccountsreceivabletoimprovethe
degreeof association.
Before Ohlsons (1995) model,
shortrun and longrun investment
scalabilitieshadbeenassociatedwith
equityvalue.BaoandBao(1989)con
structproductioncapacitiesmeasured
by the economic value added, which
are the changes in inventories and
direct labor costs to measure short

termproductivityandfixedassetsde
preciation to measure longterm ca
pacity.
Accounting earnings as a noise
when measuring economic earnings
andequitywas introducedbyKolev,
MarquadtandMcVay(2008),Collins
etal.(1997),GivolyandHayn(2000),
andBradshawand Sloan(2002). An
investor adjusts his or her focus to
earnings not based on the generally
acceptedaccountingprinciples,butin
stead on the measurement of core
potentialearnings.Compellingresults
from the studies of Bradshaw and
Sloan(2002)andBhattacharyaetal.
(2003)indicatethatearningsiselimi
nated toimprove thevalue relevance
oftheirreturnmodels.
Previous research verifies that:
(1)therearelimitationstothemodelof
Ohlson (1995), Feltham and Ohlson
(1995;1996),(2)earningsisadistur
bancewhenmeasuringeconomicearn
ings and equity (Kolev et al. 2008;
Collinsetal.1997;GivolyandHayn
2000;andBradshawandSloan2002),
and(3)thereishighvaluerelevanceby
eliminating earnings (Bradshaw and
Sloan 2002; and Bhattacharya et al.
2003). Based on the literature dis
cussed above, this study constructs
complementarymeasurementforearn
ingsbyinducingshortrunandlongrun
investmentscalabilities.Furthermore,
thisresearchisfocusedontheadapta
tion theory in which assets are the
determinantoffirmvalue(Burgstahler
andDichev1977).
195
Changes in Growth
Opportunities
Ohlsons(1995)modelmaintains
thecleansurplustheorywhichrelates
accountinginformationtothefollowing
premises: (1) stock market value is
basedondiscountedfuturedividendsin
whichinvestorshaveaneutralposition
againstrisk,(2)accountinginformation
issufficienttocalculatecleansurplus,
and(3) future earnings is stochastic,
predetermined by consecutive previ
ousearnings.However,investorsmay
respond differently to minimum or
maximumprofitability.Hence,growth
factors,ashavebeenincludedbyother
research, may affect earnings.
Rao and Litzenberger (1971),
LitzenbergerandRao(1972),andBao
andBao(1972)concludethatgrowth
anditschangeincreasefirmcompeti
tiveness.Consequently,thehigherthe
efficiency,thehighertheproductivity
andaccordinglythehigherthestock
holder and country wealth. Rao and
Litzenberger(1971)andLitzenberger
and Rao (1972) specifically disclose
thatgrowthopportunitiesaredirectly
associatedwithlongrunprospectwithin
oneindustry.Thosestudiesarebased
onMillerandModigliani(1961),con
cludingthatgrowingfirmisafirmthat
has apositiverateofreturnforeach
invested capital. It also means that
every invested resource has a lower
cost of capital than that within the
industry.
Liu et al. (2001), Aboody et al.
(2002), and Frankel and Lee (1998)
showaperspectivethatafirmsintrin
196
sicvalueisdeterminedbygrowthand
futurepotentialgrowth.Currentgrowth
drivestheincreaseinpotentialfuture
earnings, whereas future potential
growth reduces the models residual
errortoimprovethedegreeofmodel
association. Lev and Thiagarajan
(1993),AbarbanellandBushee(1997),
andWeissetal.(2008)suggestthatthe
growthininventories,grossprofit,sales,
accountsreceivable,etc.improvesfu
tureearningsgrowth.Moreover,their
researchconcludes that market value
adapts to all the growth factors.
DanielsonandDowdell(2001)exam
inedgrowingfirms,andfindthatthey
havebetterfinancialperformancethan
dootherfirms.Theirstudyalsoshows
thattheP/Bratioofgrowingfirmsis
greaterthanthatofothercompanies.
ChenandZhang(2007)findevi
dence that firm value completely de
pends on growth opportunities. The
growth opportunities per se are the
functionofassetsoperationscale,and
affect the potential to grow continu
ously.Theinclusionofgrowthopportu
nitiesisbasedontheperspectivethat
earningsandbookvaluearenotsuffi
cienttoexplainstockpricemovement.
Therefore,theanalysisoncurrentand
futureearningscouldbeenhancedwhen
externalenvironment,industry,andin
terestratearetakenintoaccount.
Changes in Discount Rate

Ohlsons (1995) model assumes
that investors take a neutral position
againstfixedriskandinterestrate.This
simplificationwasmodifiedbyFeltham
andOhlson(1995;1996),andBaginski
and Wahlen (2000). Their modifica

tionslieinthefactthatinterestratecan
change the firms future earnings
power. Related to investors percep
tion, interest rate movement may
changetheinvestorsbeliefinthefirms
earnings power since future earnings
canbereferredtoasasetofdiscount
rates givingbettercertaintyoffuture
earnings.
RaoandLitzenberger(1971),and
Litzenberger and Rao (1972) imply
that equityvaluedepends onthedis
countrateoffuturepotentialearnings.
In turn, this discount rate hinges on
pureinterestrate,andthenaffectsthe
efficiencyofthefirmsscaleofopera
tions and finally earnings. Danielson
and Dowdell (2001), and Lie et al.
(2001)findthatfirmequityishighly
affectedbyexpected discount rateto
grow assets and book value. Interest
ratehasamultipliereffect.Iftheinter
est raterelativetocurrent assets and
capitalishigherthanthepureinterest
rate,thefirmcangeneratemoreearn
ings. An alternative interpretation is
that the increase in debt or new in
vestedcapitalcouldrelativelydecrease
thecostofcapital.
Burgstahler and Dichev (1997)
suggest that a firms equity value is
increased by the adaptation theory.
This valuemayincreasebyattaining
cheaper alternative sources, such as
exploring alternative resources with
lowerinterestratetoimprovethefirms
productivity. Aboody et al. (2002),
FrankelandLee(1998),Zhang(2003)
andChenandZhang(2007)arguethat
earningsgrowthisdeterminedbyinter
est rate. It serves as an adjustment

factortothefirmsscaleofoperations.
Inotherwords, externalenvironment
factors may affect earnings growth,
such as the external interest rate se
lected by management to make the
operations efficient.
A Model of Equity Value

A model of equity value relates
accountinginformationwiththepros
pect of future cash flows. This ap
proach was employed by Ohlson
(1995),andFelthamandOhlson(1995;
1996).Themodelisbasedonthefirms
scale of operations (scalability) and
profitability.Scalabilityandprofitabil
ityareafunctionofcurrentcondition
andfuturepotentialcashflows.Thus,
earningsplaysamajorroleduetoits
abilitytoshowthefirmstendencyto
expandoperations ortoabandonop
erations.Equityvaluemodelisapro
cessofmeasuringequityinvestmentto
expand or to cease operations
(BurgstahlerandDichev1997).Zhang
(2003)developedtheequityvaluemodel
thatsimplifiedtheprobabilityoffirms
going concern or firms abandoning
operations.
Zhang(2003)andChenandZhang
(2007)symbolizetheequityvaluefi
nancedondatet(endperiodt)withVt.
Next, Xt represents earnings during
periodt. Btisthebookvalueoffirm
equity.Et(Xt+1)isexpectedfutureearn
ings,kisearningscapitalizationfactor,
P is the probability of abandonment
option,Cistheprobabilityofcontinua
tionoption,qt Xt/Bt-1isprofitability
basedonROE,duringperiodt.Mean
197
Vt = kEt(Xt+1)+Bt.P(qt)+
Bt.gt .C(qt).....................(1)
while,gtisearningsgrowthopportuni
ties.ChenandZhang(2007)formulate
equityvalueasfollows.
Model(1)formulatesthatequity
value(Vt)isassociatedwithexpected
future earnings from invested assets
(Et(Xt+1),earningscapitalizationfactor
(k), the probability of abandonment
option(P(qt)), andthe probability of
continuationoption(C(qt)).Thismodel
indicatesthatequityvalueisequalto
thecontinuationofcurrentoperations
(qt)addedbyfirmgrowthopportuni
ties,eitherpositiveornegative(gt).
BasedonthemodelbyChenand
Zhang(2007),thisstudyexpandstheir
model by complementing and trans
forming it into a detailed form. This
transformation is supported by Ou
(1990)whoimpliesthatnonearnings
accountingvaluecanbeusedascur
rent and future earnings predictors.
Nonearningsinformationmaygivean
additionalpredictivevaluereflectedin
stockprice.Therefore,thisstudyadds
thenonearningsvaluesaspredictors.
The transformation is based on
the rationale that qt Xt/Bt-1 may be
specifiedbysrtandlrt.Shortrunin
vestment scalability is srt = (Asrt Lsrt)/(Asrt-1-Lsrt-1), where Ais assets
andLisliabilities;andlongruninvest
ment scalability is lrt = (Alrt - Llrt)/
(Alrt-1-Llrt-1). The transformation re
sultsinacompleteformulaexpressed
inModel(2)asfollows.
198
Vt = kEt(Xt+1)+Bt(P(srt)+
P(lrt))+Bt.gt(C(srt)+
C(lrt))............................(2)
Bytransformingqtintosrtandlrt,
this study develops a logical frame
workasfollows.Parameterqtasearn
ingsiscapitalinflowtothefirmfromits
operatingactivities.Thus,Model(1)is
basedonthecapitalcashflows.Itis
formulatedinthisstudythatearningsis
measuredbyassets,symbolizedassrt
andlrt.Inordertosynchronizewiththe
flow form, this study transforms the
stockformintotheflowformbymea
suring the changes,namely by (AsrtLsrt)and(Alrt-Llrt),andthennormal
izesthemonthebasisofpriorperiod
(Asrt-1-Lsrt-1) and (Alrt-1-Llrt-1). Sec
ondly,Zhang(2003)positsthatearn
ingsincreasesduetothefirmsexpan
sion. This study formulates that the
increaseinearningsisnotonlycaused
bythefirmsexpansion,butalsobythe
scalability of their productive assets.
Assetsrefertoallresourcesmanaged
to generate earnings. Therefore, the
net difference between assets and li
abilitiescouldbeusedtomeasurethe
firms earnings power. Additionally,
thetransformationofqtintosrtandlrt
is based on Rao and Litzenberger
(1971),suggestingthatthebookvalues
ofassetsandliabilitiescouldincrease
ordecreasethepotentialfutureearn
ings(Smith1973).
ThenextstepisModel(2)simpli
fication.Earningsgrowthusuallyfol
lows the random walk, meaning that
earningsgrowthdepends onprevious
yearsobservedearnings.Withqt+1=
qt + et+1,withet+1beingthemeanerror
close to zero, then E t (X t+1 )=
Et(Btqt+1)= Btqt, and with k = 1/rt.
Assets growthusedtogenerateearn
ingsfollowsthesamepatternasdoes
earningsgrowth.Transformationofqt
intosrtandlrtresultsinthefollowing
equation.
Et (Xt+1)= Et(Btqt+1)= Btqt=
Bt((srt) + (lrt))........(3)
A Model of Stock Return

To develop a return model, this
studyconsiderstheequityvaluemodel,
whichassumesthatthechangeineq
uity value starts from date t-1 to t,
notatedas Vt.ToconstrueEquation
(6),thechangeinfirmvalueisequalto
thechangeinbookvalueofequityasa
functionoffourcashflowrelatedfac
tors(Btv(srt-1,lrt-1,gt-1,rt-1))andthe
bookvaluemultipliedbythechangesin
all four factors (srt, lrt, gt, and
rt).Subsequently,returnformulation
isshownbythefollowingEquation6.
Substituting Equation (3) into

Model(2)resultsinEquation(4)be
low.
(srt)+(lrt)
Vt = Bt+P(sr
)+
t
rt
P(lrt)+gt(C(srt)+C(lrt))
......................................(6)
To show the change in each re
latedfactor,thedifferentialequationis
......................................(4)
developed as follows. v1
AccordingtoEquation(4),anad
ditionofoneunitofassetsoroneunitof
investedcapitalintothefirmsequity
(v)couldincreasewithacertainmag
nitudecurrentequityvalue.Itsformu
lationinEquation(5)isasfollows.
(srt)+(lrt)
Vt = Btv+P(sr
)+
t
rt
v2
dv
dv
, and v3
d (lrt 1 )
drt 1 , with
dv
C ( srt 1 ) (lrt 1 ) .
dg t 1
IfthefirmpaysdividendDtduring
periodt,thenetcontributionforcurrent
return(Rt)isasfollows.
P(lrt)+gt(C(srt)+C(lrt))
......................................(5)
dv
d (srt 1 ) ,
Rt
DVt+Dt
.........(7)
199
Bt
Bt1
Rt=v+v1srt
Vt1
Vt1
Bt1
v2lr
+(C(Srt)+
t
Vt1
Bt1
C(lrt))gt+
Vt1
Bt1
Dt
v3rt+
Vt1
Vt1
rentperiod,orreferredtoastheclean
surplus relation, then Bt = Xt Dt.
ThisequationisreversedintoDt = Xt
Bt.Ifthisequationissubstitutedinto
Equation(10),itresultsinthefollowing
equation.
Xt
Bt1
Rt=v+v1srt
Vt1
Vt1
Bt1
B t Bt1
v2lrt+ 1
+
Vt1
Vt1 Bt1
..........................................(8)
Substituting Equation (7) into
Equation(6),anequationtocalculate
stockreturnduringcurrentperiod(Rt)
isasfollows.
Bt Bt
v
Becauseof,
V t 1 B t 1
substituting it into Equation (9) will
obtainEquation(9)asfollows.
Bt
Bt1
Rt=+v1srt
Vt1
Vt1
Bt1
(C(Srt)+C(lrt))gt+
Vt1
Bt1
Dt
v3rt+
Vt1
Vt1
..........................................(9)
Assumingthatbookvaluegrowth
isequaltoearningsduringcurrentpe
riodsubtractedbydividendduringcur
200
Bt1
(C(srt))+C(lrt))gt+
Vt1
Bt1
v3rt
Vt1
..........................................(10)
Equation (10) shows that stock
return is a function of the following
factors:(1)earningsyield(Xt/Vt-1), (2)
thechangeinearningsfromshortrun
invested assets (srt), (3)the change
inearningsfromlongruninvestedas
sets (lrt), (4) the change in book
equityvalue(Bt/Bt-1),(5)thechange
ingrowthopportunities(gt),and(5)
thechangeindiscountrate(rt).
Hypotheses Development
Earnings Yield
Earningsyield(Xt)showsanaddi
tionalvaluegeneratedsincethebegin
ning of invested capital (henceforth,
current earnings). Earnings yield is

deflatedbybeginningoftheyearfirms
equityvalueusedtogeneratecurrent
earnings.BasedonModel(11),ifearn
ingsyieldincreases,stockreturnwill
increase, and vice versa (Rao and
Litzenberger 1971; Litzenberger and
Rao 1972; Bao and Bao 1989;
BurgstahlerandDichev1997;Collins
etal.1999;Collinsetal.1987;Cohen
andLys2006;LiuandThomas2000;
Liuetal.2001;Weissetal.2008;Chen
andZhang2007;Ohlson1995;Feltham
andOhlson1995;FelthamandOhlson
1996;Bradshawetal.2006;Abarbanell
andBushee1997;LevandThiagarajan
1993; Penman 1998; Francis and
Schipper1999;DanielsonandDowdell
2001;Aboodyetal.2001;Eastonand
Harris 1991; andWarfield and Wild
1992).
Theassociationbetweenearnings
yield(Xt/Vt-1)andstockreturn(Rt)is
alwayspositive.Because
dRt
1
dX t Vt 1 ,
and1/Vt-1isalwaysgreaterthanzero,
thendRt/dXtisalwayspositive.There
fore, our hypothesis is stated as fol
lows.
HA1: Earnings yield is positively related to stock return
Short-run and Long-run

Investments
Shortrun investment (srt) and
longrun investment (lrt) are assets
investedbythefirmtogeneratefuture
earnings.Accordingtothemodel,short
run and longrun investments could

generate future earnings when short
run and longrun assets values are
greater than the cost of capital. Ac
cordingly, the increases in shortrun
and longrun assets will improve the
firmsabilitytogeneratefutureearn
ingsas wellasthefirmsbookvalue
(Bao and Bao 1989; Cohen and Lys
2006;Weissetal.2008;Bradshawet
al.2006;AbarbanellandBushee1997;
AbarbanellandBushee1997;Francis
andSchipper1999).Ontheotherhand,
theincreasesinshortrunandlongrun
assetswilldecreasethecostofequity
capitalsincetheydecreasetheability
topaydividends.Because(Bt-1/Vt-1)is
expectedtobegreaterthanone,short
run assets are positively linked with
stockreturn.
The differential equation is
B
B
dRt
v1 t 1 C t 1 g t .
d () srt
Vt 1
Vt 1
Because in the beginning Bt-1/Vt-1 is

alwaysgreaterthanzero,v1isalways
positive. When positive Bt-1/Vt-1 af
fectspositive gt, then dRt/dsrt must
begreaterthanzero. Usingasimilar
method,longrunassetsarealsoposi
tivelyassociatedwithdRt/dlrt.Hence,
itishypothesizedthat:
HA2 : The change in short-run
vested assets is positively
lated to stock return
HA3 : The change in long-run
vested assets is positively
lated to stock return
inreinre-
201
Changes in Book Value

The change in book value is the
thrustoffirmsequityvaluemeasure
ment.ItismeasuredbyBt/Bt-1 which
is current earnings divided by begin
ningbookvalue.Inotherwords, Bt/
Bt-1=v[Bt/Vt-1] implies that the in
creaseinearningsisproportionaltothe
growthofmarketvalue,andalsowith
the change in stock return. Conse
quently,thechangeinstockreturnis
proportionalafterconsideringthebe
ginningmarketvalue(Vt-1).Therefore,
visexpectedtobepositiveandgreater
thanzero(RaoandLitzenberger1971;
LitzenbergerandRao1972;Baoand
Bao 1989; Burgstahler and Dichev
1997;Collinsetal.1999;Collinsetal.
1987; CohenandLys 2006; Liuand
Thomas2000;Liuetal.2001;Weisset
al.2008;ChenandZhang2007;Ohlson
1995; Feltham and Ohlson 1995;
FelthamandOhlson1996;Bradshaw
et al. 2006; Abarbanell and Bushee
1997;LevandThiagarajan1993;Pen
man1998;FrancisandSchipper1999;
DanielsonandDowdell2001;Aboody
etal. 2001;EastonandHarris1991;
andWarfieldandWild1992).
With
B 1
dRt
1 t 1
dBt Vt 1 Bt 1
Bt 1
1
,andB
/Bt-1was
t-1
Bt 1 Vt 1 Bt 1
greater than 1/(Vt-1Bt-1), then dRt/dBt
is always positive and greater than
zero.Thisassociationisstatedinthe
followinghypothesis.
HA4: The change in book value is

positively associated with stock
return
Changes in Growth
Opportunities
Thefirmsbookvaluedependson
thechangeingrowthopportunities(gt).
In other words,stock return depends
on whetheror not the firmgrows. A
firmiscalledanoptiontogrowifitcan
increase its book value and, in turn,
increase its stock price. Similarly, a
firmiscalledanoptiontoexpandwhen
itcouldgeneratefutureearningsfrom
itsassets.Thegrowthconceptisalso
inspiredbythefirmsabilitytogener
ate future earnings from multiplied
shortrun and longrun assets
(C((srt )+(lrt )). It infers that assets
growthmaybedifferentfromthegrowth
ofbookvalue.Therefore,growthop
portunities(gt),afterbeingadjusted
byBt-1/Vt-1andconsideringthemulti
pliereffectofC((srt)+(lrt)), arecon
jecturedtohaveapositiverelationwith
stock price variation (Rao and
Rao1972;BaoandBao1989;Weisset
al.2008;Ohlson1995;Abarbanelland
Bushee 1997; Lev and Thiagarajan
1993; Danielson and Dowdell 2001;
andAboodyetal.2001).
Thechangeinbookvalue,which
increasesproportionallywiththegrowth
of beginning shortrun and longrun
investedassets,supportsthispositive
dR
V t 1
202
association.With dg t C ( sr t ) C
B
C ( lrt ) t 1 ,whenBt-1/V/t-1isgreater
than zero and C(srt) and C(lrt) are

greaterthanzero,then
dRt
dg t isgreater
thanzero.Thehypothesisisstatedas
follows.
H A5 : The change in growth opportunities is positively associated
with stock return

Discountratecouldgeneratepo
tentialfuturecashflowspricedbythe
cost of book value. Indeed, discount
rate(rt)affectsfuturecashflows.It
also affects book value and, in turn,
stockreturn.Thegreaterthediscount
rate, the lower the future cash flows
are, and vice versa (Rao and
Rao 1972; Burgstahler and Dichev
1997;Liuetal.2001;ChenandZhang
FelthamandOhlson1996;Danielson
and Dowdell 2001; and Easton and
Harris1991).
dR
t
t 1
With d r v 3 V ,whenBt-1/
t
t 1
Vt-1isgreaterthanzero,andv3isone
unitinvestment,because rt
V t 1
B t 1
1
,then
k
becomessmallerthanzero.
Hence,ournexthypothesis is as
follows.
HA6: The change in discount rate is
negatively associated with
stock return
Research Methods
Data
All cashflowrelated factors de
terminingthereturnmodelinthisre
search(earningsyield,expectedearn
ingsyield,shortruninvestmentassets
andexpectedshortruninvestmentas
sets, longrun investment assets and
expected longrun investment assets,
thechangeincapital,andthechangein
growthopportunitiesandthechangein
expected growth opportunities) are
gathered from financial statements.
Dataonexpectedvaluesandfinancial
statementsprospectusescanbefound
inthenotestofinancialstatements.All
dataareobtainedfromOSIRISdata
base.Thechangeindiscountratedata
are obtained from the central banks
websiteofeachcountry,eventhough
the financial statements of each firm
alsocontainlongtermliabilitiesorob
ligationinterestrate.Pureinterestrate
isproxiedbythelongtermobligation
interest rate enacted by the central
bankineachcountry.Thisstudy,then,
extracts stock price and return for
each firm from the stock markets in
everycountrydirectly.
Thisstudysobservationembraces
allAsiaPacificcountriesandtheU.S.,
along with their stock markets and
centralbanks.Thisstudyemploysdata
during20022009,excluding2003and
2008becauseoffinancialcrisisonall
stock markets. However, these years
arestillincludedtobethebaseyearfor
calculating the expected value com
paredtopreviousyears.
203
<
204
Rit = +xit+qit+bit+
git+rit+eit
........................................(11)
<
Thisstudyusesthepurposivesam
plingwhereasetofsamplearechosen
undercriteria suitedfor researchob
jectives. The criteria are as follows.
Firstly,sampleiscomprisedofmanu
facturingandtradingfirms.Secondly,
iteliminatesfirmswithnegativebook
values at the beginning and the end
(Bit-1 <0; Bit <0). This exclusion is
based on the logical reasoning that
firmswithnegativebookvaluestendto
abandonoperationsowingtotheirshort
run and longruncapacities. In other
words,thosefirms are inclinedtogo
broke.Thirdly, sampleconsistsoffirms
whosestocksaretradedactively.Sleep
ing stocks are excluded as they can
compromise this researchs validity.
This study also selects sample with
liquidity(LQ-n)accordingtoeachstock
market.
Thisstudyisaimedatimproving
ChenandZhangs(2007)model.There
fore,thisresearchiscarriedoutthrough
the following stages. Firstly, we ex
amineChenandZhangs(2007)model.
Secondly,this studyexamines a new
model using Equation (11). Thirdly,
thisstudycomparestheresultsofex
aminations(1)and(2).
Thefirstexaminationislinearre
gressionasfollows.
<
Sampling Method
Variables Measurement and

Examination
<
This study is expected to over

come the cultural problem and the
inefficiencyofstockmarketsbasedon
marketwideregimeshiftingbehavior
approach(David1997;Veronesi1999;
Conradetal.2002;andHoandSequeira
2007).Thisapproachindicatesthatthe
movement of stock price or return
modelshouldbeequivalentforallstock
marketssinceitisbasedonaccounting
information.Itisalsoconjecturedthat
within certain classifications, the re
sponseofstockpricemovementagainst
accountinginformationshouldbethe
same.Therefore,theculturalandthe
efficient stock market problems are
eliminatedwhenthemarketefficiency
levelisappliedwithinthereturnmodel.
withRitisannualstockreturnforfirm
iduringperiodt,measuredinoneyear,
one year and three months, one year
andsixmonths,andoneyearandnine
months. The calculation begins from
thefirstdayofthebeginningyeartothe
endofthemonthduringperiodt;xitis
earnings generated by firm i during
period t, calculated by earnings ac
quiredbycommonstockholdersduring
period t (Xit) divided by the opening
marketvalueofequityincurrentperiod
(Vit-1 ); qit (qit qit 1 ) Bit 1 / Vit 1
isthechangeinprofitabilityoffirmi
duringperiodt,deflatedbytheopening
bookvalueofequityincurrentperiod.
Profitabilityiscalculatedusingthefor
mulaqit= Xit / bit-1; b [( B
it
it
Bit 1 ) / Bit 1 ](1 Bit 1 / Vit 1 ) isbook

equitycapitalortheproportionalchange
inequitybookvalueforfirmiduring
period t, adjusted by one minus the
openingbooktomarketequityratioin
currentperiod; g it ( g it g it 1 ) B
) Bit 1 / Vit 1 isthechangeingrowthis
thechangeingrowthopportunitiesfor
firmiduringperiodt; rit (rit rit 1 ) B
) Bit 1 / Vit 1 isthechangeindiscount

rateduring t; a, b, g, d, w and j are
regression coefficients; and eit is re
sidual.
Themodelusedinexamination(2)
comparabletotheexaminationofChen
andZhang(2007)inEquation(12)isas
follows.
Rit = +xit+srit+lrit+
pit+git+rit + eit
........................................(12)
withadditionalexplanationsformodel
(12) are: (1) srit ( Asrit Lsrit ) is
currentassetsminuscurrentliabilities,
srit (srit srit 1 ) / srit 1 ( Bit 1 / Vit 1 )
<
<
<
<
qit+bit+git +
<
<
growthopportunitiesforfirmiduring
periodtmeasuredbyconsideringthe
Rit = +xit+qit+qit+
git + git +
<
))( g it g it 1 ) Bit 1 / Vit 1 isthechangein
The First Sensitivity Analysis

ChenandZhang(2007)examined
theirmodelsensitivitybycategorizing
intothreegroups:lowgroup(L),me
diumgroup(M),andhighgroup(H).
Theproposedconsiderationisthatthe
coefficients on H group should be
greaterthanthoseonMandLgroups,
andgreaterthanzero(gH>gM>0, and
wH>wM>0).ModelusedbyChenand
Zhang(2007)isasfollows.
<
is the change in srit adjusted by the

currentperiod;(2) lrit ( Alrit Llrit )
isfixedassetssubtractedbylongterm
liabilities, lrit (lrit lrit 1 ) / lrit 1
( Bit 1 / Vit 1 ) isthechangeinlritad
justedbytheopeningbooktomarket
equity ratio in current period; (3)
p it = B i t /B i t-1 (1-B i t /V i t-1 ) is the
changeinprofitabilitymeasuredbythe
change in book value of equity and
adjusted by one minus the opening
booktomarketequityratioincurrent
period;(4) g it (C ( srit ) C (lrit ))(
multipliereffectofgrowthopportuni
tiesagainstshortrunandlongrunin
vestedassets.Itisthenadjustedbythe
currentperiod;othervariablesareiden
tical.
It shouldbe notedthat Rit in re
gressionmodel(13)representsvarious
return periods, namely one year, one
year and three months, one year and
six months, and one year and nine
months. This study applies multiple
periods because by inducing invest
mentscalability,currentshortrunand
longrun assets are considered to be
utilizedtogeneratecurrentandfuture
earnings. Therefore, different return
periodsrefertocurrentreturn(Rit)and
potentialfuturereturn(Ri,t+1).Never
theless,itisstillnotatedasRit.
rit + eit
........................................(13)
205
withM and H represent groups with

greaterthanthelowergroup.
Thisstudydevelopstheclassifica
tionofprofitabilityandgrowthopportu
nitiesusingfourcategories:lowergroup
(L), lowermedium group (LM), me
diumhighgroup(MH),andhighgroup
(H).Thisexaminationexpectsthefol
lowing results: l H >l MH >l LM >0,
cH >cMH>cLM>0, fH>fMH>fLM>0, and
pH>pMH>pLM>0. Thisstudyalsoper
formsthemodelslinearitytestssince
linearregressionrequiresthatthemodel
be free from normality, hetero
scedasticity,andmulticolinearityprob
lems.Gujarati(2003)suggeststhata
linear regression model be free from
unbiasederrors.
The Second Sensitivity

Examination
This study performs sensitivity
examinationsforModels(12)and(13)
by splitting the sample into various
partitions.Thepartitioningcriterionis
theratiobetweenbookvalueandmar
ket value of stock (P/B ratio). The
sensitivityexamination aims to show
the return model consistency under
variousmarketlevels.Moreover,model
sensitivitymaybeachievedindifferent
market chances. It is performed by
splittingthesampleintoquintilesbased
onP/Bratio.
206
Analysis, Discussion, and

Findings
Descriptive Statistics
Thisstudyacquires6,132sample
firmyears (25.45%) from available
initial sample of 24,095 firmyears
(100%)fromallstockmarketsinAsia,
Australia and the U.S. during 2009.
Before 2009, predicted data are un
availableintheOSIRISdatabase.The
numberofdataexcludedwiththerea
sonsareasfollows.First,stockpriceor
returndataincomplete,8,939(37.10%).
Second,earningsdataunavailable,661
(2.74%).Third,noexpectedearnings
and growth opportunities, 8,038
(33.36%).Fourth,firmswithnegative
earnings,167(0.69%).Fifth,extreme
valuesofearningsandexpectedearn
ings,120(0.50%).Finally,inabilityto
calculate abnormal returns based on
Fama and French (1992, 1993, and
1995),38(0.16%).
Dataexcludedduetoallsixfac
tors above are 17,963 firmyears
(74.55%). The most common exclu
sion is due to stockprice incomplete
andearnings dataunavailable, which
addupto70.46%.Thefinalsamplehas
fulfilled all required criteria. For in
stance,thisstudyisunabletoacquire
dataonfirmswithnegativebookval
ues because such firms do not have
completedataonstockmarketprices.
The complete data are presented in
Table1.
Table1.Sample Data
No.
Decrease
Number
%
Note
Sample
Number
%
1
2
3
4
5
6
7
Population
Stockpricedataincomplete
8,939
Earningsdataunavailable
661
Expecteddataunavailable
8,038
Lossingcompanyexclusion
167
Extremevalueexclusion
120
Inabilitytocalculateabnormalreturn
38
37.10
2.74
33.36
0.69
0.50
0.16
24,095
15,156
14,495
6,457
6,290
6,170
6,132
100.00
62.90
60.16
26.80
26.11
25.61
25.45
Total
74.55
17,963
Table 2. Descriptive Statistics

No. Var.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Min.
Max.
Mean
Ri1
0.9954
9.8966 0.8463
Ri2
0.9964
8.0000 0.4600
Ri3
0.9966
9.0000 0.1627
Ri4
0.9939
6.6310 0.0528
Xit
0.0000
46.2025 0.2092
q it
55.1125
58.8148 0.0571
b it
54.3503
33.3750 0.0873
g it
10.6073
54.4328 0.1977
r it
29.9957
28.9790 0.1362
sr it 506.3845 202.6165 0.0336
lrit 250.0161 289.1262 0.2959
p it
54.3503
33.3750 0.0873
PB it
0.0026
70.4000 1.0362
Vit
0.0100 6,843.3600 39.3251
Bit
0.0200 4,601.1500 29.8525
AR i1
2.6632
8.9513 0.0000
AR i2
2.3542
7.1236 0.0000
AR i3
1.8951
8.5445 0.0000
AR i4
1.3450
6.2174 0.0000
Median Std. Dev. Perc. - 25 Perc. - 75

0.5880
0.9999
0.2419
0.7506
0.0327
0.5932
0.0356
0.5175
0.0968
0.9104
0.0071
1.7100
0.0011
1.7231
0.0683
1.2737
0.0737
1.3559
0.0907 11.8351
0.0609
6.3004
0.0011
1.7231
0.6831
2.4254
3.6300 248.8796
2.7450 189.1163
0.2030
0.9306
0.1283
0.6854
0.0862
0.5433
0.0818
0.4939
0.1667 1.2500
0.0151 0.7500
0.1981 0.3689
0.2450 0.2186
0.0532 0.1959
0.0313 0.0772
0.0608 0.0553
0.0056 0.1976
0.4694 0.0301
0.1125 0.4198
0.0368 0.2572
0.0608 0.0553
0.3594 1.2095
1.1600 16.3400
0.5400 10.6200
0.5655 0.3361
0.4069 0.2438
0.3150 0.1953
0.2785 0.1558
207
Thisstudyperformsdataanalysis
toinvestigateinitialdatatendency.The
descriptive statistics are presented in
Table 2. Return for one year period
(Ri1)is 0.8463, whichthendecreases
overtimeandplungesto0.0528forRi4.
Thedecreasesoccurinalllevelswithin
25thpercentile(from0.1667to0.2450)
and 75th percentile (from 1.2500 to
0.2186). These findings indicate that
market value in the longer period is
closer to real firms intrinsic value.
Withthistendency,thefirmsfunda
mentalvaluecalculatedusingaccount
ing information is expected to be re
flectedinthefirmsmarketvalue.
Focusingonearnings aftertaxes
(xit), this study only employs profit
firms. Earnings minimum value is
0.0000, with mean 0.2092, median
0.0968,andstandarddeviation0.9104.
The median lies on the left from its
mean,signalingthatsomefirmshave
extremely great earnings, and so the
meanispushedupward.However,itis
notaproblemasthestandarddeviation
islessthanone.Thealignedmovement
between return and earnings shows
thattheyarelikelytoberelated.The
change in earnings power (qit), the
changeingrowthopportunities(git),
andlongrun assets scalability (lrit)
showrelativelythesamepatternasthe
variationofearnings.Meanwhile,the
change in discount rate (rit ), the
changeinshortrunassets scalability
(srit),andthechangeinprofitability
(pit) show otherwise. However, the
changeindiscountrateisnotexpected
tobealigned.Nevertheless,thechange
inshortrunscalabilityandthechange
208
in profitability with such movement

mayreducethedegreeofassociation
ofthereturnmodel.
Firmsbookvalue(Bit),marketto
bookvalueratio(PBit),andstockprice
(Vit)arealways positivebecause,ac
cordingto thecriteria, this studyex
cludes firms with negative earnings
aftertaxesandnegativebookvalues.
Evenaftertheeliminationofextreme
values,BitandVitstillhavelargemaxi
mum values, especially for the data
fromdevelopingcountrieswherestock
marketvaluesusuallymoveawayfrom
theirbookvalues.Bookvalue(Bit)data
withmeanof29.8525andmedianof
2.7450 resemble thepattern of stock
market value. The pattern does not
harm the relation, and the pattern of
firmsintrinsicvalue(Vit)isreflectedin
stock market value at the end of ac
countingperiod.
Abnormal return calculation is
basedonthemodelbyFamaandFrench
(1992;1993and1995).Resultsshow
meansof0.0000forARi1,ARi2, ARi3,
and ARi4,indicatingthattheestimation
isprovenvalidmathematically.Stan
darddeviationofabnormalreturnbe
comessmallerthroughouttheanalysis
period,from0.9306(ARi1)to0.4939
(ARi4).Therefore,itcanbeconcluded
that abnormal return moves propor
tionallywiththefirmsmarketvalue,
whichcloselyreflectsthefundamental
value derived from accounting infor
mation.Abnormalreturnmovementis
inaccordwithreturnandearnings(xit)
movements,earningspower(qit),the
longrunassetsscalability(lrit),and
all expected values. In addition, this

studycouldachieveahigherdegreeof
association.
Analysis of Chen and Zhangs

(2003) Model
This study, at the first analysis,
examines Chen and Zhangs (2003)
model,whichisthebasicmodel(Model
12). The basic model constructs five
cashflowrelated factors associated
withreturn:(1)earningsyield(xit),(2)
thechangeinfirmsbookvalue(bit),
(3)thechangeinearningspower(qit),
(4)thechangeingrowthopportunities
(git),and(5)thechangeindiscount
rate (rit ). The results of the first
analysisarepresentedinTable3.
TheanalysisofChenandZhangs
(2003)modelhasyettoexaminethis
studyshypotheses.Rather,itiscon
ductedasaninitialinvestigationofthe
five cashflowrelated factors associ
ated with stock return. The results
showthatthreevariables,i.e.,earnings
yield(xit),firmsbookvalue(bit),and
growthopportunities(git),aresignifi
cantly(at1%level)relatedtovarious
specifications of return (Ri1 to Ri4).
However,thisstudyisunabletofind
evidenceontherelationbetweenearn
ings power (qit ) and stock return
which Chen and Zhang (2003) has
proven consistently. Meanwhile, the
result for the change in pure interest
rate (rit), as in Chen and Zhangs
(2003)model,isalsoinsignificant.Con
sequently,thisstudyconcludesthatthe
basic model is adequately substanti
ated,exceptforearningspower.How
ever,thebasicmodelanalysisshowsa
sufficientdegreeofassociationwithF
valueof35.5187,whichissignificantat
1 percentlevel.Thebasicmodelhas
R2of2.82 percentforRi1,andlower
forothertypesofreturn.Thedegreeof
association with the adjusted level is
notsignificantlydifferent,withadj-R2
of2.74 percent.
Theresultsoftheinitialinvestiga
tion are interesting. The rejection of
earningspower(qit)behooves us to
changethebasicmodel.Theresultsof
thebasicmodelanalysisimplythatthe
relationbetweenaccountinginforma
tion and stock return is not flexible
enough with respect to the forms of
stock market efficiency, economic
uncertainty,andthereflectionoffirms
fundamentalvaluepertainingtodebtor
capitalconcentration.Theresultsneed
totransformthebasicmodelintoanew
modelwhichismoredetailedandable
toexplainthechangeinearningspower.
Furthermore,thetransformationdoes
notconsiderthechangeinpureinterest
rate(rit),whichisactuallyservesas
aliftforthechangeinearningspower.
The change in pure interest rate has
beenproveninconsistentlybyprevious
studies.Thisstudyconjecturesthatthe
changeinpureinterestrateshouldbe
morereflectedwhenitisspecifiedinto
shortrunorlongrunearningspowers.
209
Table 3. The Results of Basic Model Analysis

Var(s)
Xit
q it
b it
g it
r it
F-value
R2
Adj-R2
Ri1
Pred.
Coef.
t-value
Sig.
Coef.
t-value
?
+
+
+
+
-
0.8096
0.1452
0.0002
0.0450
0.0770
0.0370
61.3526
6.7848
0.0228
4.7703
7.0549
3.9584
35.5187
2.82%
2.74%
0.0000 ***
0.0000 ***
0.9818
0.0000 ***
0.0000 ***
0.0001
0.0000 ***
0.4447
0.0518
0.0071
0.0277
0.0438
0.0158
44.4938
3.1938
1.0400
3.8822
5.2991
2.2393
13.5133
1.09%
1.01%
Var(s)
Xit
q it
b it
g it
r it
F-value
R2
Adj-R2
Ri2
Ri3
Sig.
0.0000
0.0014
0.2984
0.0001
0.0000
0.0252
0.0000
***
***
***
Ri4
Pred.
Coef.
t-value
Sig.
Coef.
t-value
Sig.
?
+
+
+
+
-
0.1548
0.0203
0.0084
0.0191
0.0246
0.0000
19.5395
1.5765
1.5582
3.3806
3.7618
0.0070
6.0406
0.49%
0.41%
0.0000 ***
0.1150
0.1192
0.0007 ***
0.0002 ***
0.9944
0.0000 ***
0.0419
0.0397
0.0019
0.0256
0.0248
0.0017
6.0803
3.5517
0.4119
5.2008
4.3416
0.3432
10.9147
0.88%
0.80%
0.0000
0.0004
0.6805
0.0000
0.0000
0.7315
0.0000
***
***
***
***
***
***
***
Notes: Numberofobservation(N):6,132.Rit:stockreturn,firmiduringperiod1 (ayear),2(ayearandthreemonths),3(a

yearandsixmonths),and4(ayearandninemonths); xit:earnings,firmiduringperiodt; qit:changeofprofitability,firm
iduringperiodt; bit:changeofbookvalue,firmiduringperiodt; git:changeofgrowthopportunities,firmiduringperiod
t;rit:changeofdiscountrate,firmiduringperiodt;***significantat1%level,**significantat5%level,*significant
at10%level.Linearitytestforthismodel12showsthat:(1)WithKolmogorovSmirnovtestshowstvalue9.036andp
value0.000,andJarqueandBerrashowstvalue15,202.42andchisquare0.000,itmeansthattheresidualsarenot
distributednormally.However,normalitytestisignorableforlargedatasamplethatis6,132.Ittendstofollowacentral
limittheorem(Gudjarati2003).(2)Glejsers testforheteroscedasticityshowsthatallvariableshavesignificanceabove
0.05,withtvalue(sig.)xitamountto0.013(0.989);qitamountto0.014(0.989);bitamountto0.007(0.994);gitamount
to0.073(0.942);andritamountto0.010(0.992).Thetestshowsthatthedataisfreefromheteroscedasticityproblem.(3)
MulticolinearitytestshowsthatallvariableshaveVIFaboutonewhichmeansthatthereisnocolinearityamongvariables,
VIFvalueforeachvariableis,xitamountto2.394;qitamountto1.483;bitamountto1.664;gitamountto1.218;andrit
amountto1.010.
210
Analysis of Investment
Scalability Model
The second analysis transforms
thebasicmodelanalysis,inwhichwe
includethechangeinearningspower
(qit)intoamodelusingthechangein
shortrun earnings power (srit) and
longrun earnings power (lrit). This
modelisalsocalledtheshortrunand
longruninvestmentscalabilityinduc
ingmodel(Model13).Themodelspeci
fiestheearningspowerintomorede
tailedformstoinvestigatetheirasso
ciations with the variation of stock
price. Table 4 presents the analysis
results.
TheresultsofModel12showthat
earningsyield(xit),thechangeinbook
value (bit), the change in shortrun
earningspower(Dsrit), thechangein
longrun earnings power (lrit), the
andthechangeindiscountrate(rit)
areassociatedwithstockpricemove
ment. Consequently, HA1 , HA4 , and
HA5 are confirmed at 1 percent level
for return models Ri1 Ri4. HA4 is
partiallysupportedat10percentlevel
onlyforRi1 returntypewithtvalueof
1.7644.HA3issupportedforRi1return
typeaswellasforRi2 withtvalueof
1.7466,whichissignificantat10per
cent level. The results of Model 13
examinationshowanadequatedegree
ofassociationwithFvalueof31.3601,
whichissignificantat1percentlevel.
ThemodelhasR2of2.98percentfor
Ri1 type, and lower for other return
types. The model has adj-R2 of 2.89
percent.
The analysis results show that
Model13isabletoexplaintherelation
betweenthechangeinearningspower
(qit)andstockreturnvariationafter
specifyingitintomoredetailedforms,
i.e.,shortrun(srit)andlongrun(lrit)
investment scalabilities. HA2 and HA3
are confirmed for both Ri1 and Ri2
returntypes.HA2 isalsosupportedfor
Ri2 return type. The findings suggest
thattheeffectofearningspoweronthe
aggregate value is actually weak.
Therefore,splittingtheearningspower
intomoredetailedformsisnecessary.
Therefore,itsassociationwiththevaria
tion of stock return becomes more
comprehensible. Model 13 is better
than the basic modelin its degree of
association with adj-R2 of 2.89 per
cent, which is better than that of the
basicmodel(2.74%).
211
Table 4. The Results of Investment Scalability Model Analysis

Var(s)
Ri1
Pred.
X it
srit
lrit
p it
g it
r it
Fvalue
R2
AdjR2
?
+
+
+
+
+
Coef.
t-value
0.8075
0.1447
0.0030
0.0035
0.0461
0.0833
0.0374
31.3601
2.98%
2.89%
61.4695
7.9547
2.6663
1.7644
4.9185
7.5241
4.0118
0.0000
Var(s)
Sig.
Coef.
t-value
Sig.
0.0000 *** 0.4430

0.0000 *** 0.0601
0.0077 *** 0.0015
0.0777 *
0.0006
0.0000 *** 0.0286
0.0000 *** 0.0461
0.0001
0.0156
***
11.6169
1.13%
1.03%
44.5037
4.3603
1.7446
0.4149
4.0283
5.4937
2.2068
0.0000
0.0000
0.0000
0.0811
0.6782
0.0001
0.0000
0.0274
***
Coef.
t-value
Sig.
0.0000 *** 0.0416

0.0053 *** 0.0418
0.2554
0.0008
0.2846
0.0017
0.0004 *** 0.0257
0.0002 *** 0.0271
0.9370
0.0016
***
9.7857
0.95%
0.85%
6.0579
4.3937
1.3158
1.6076
5.2351
4.6801
0.3181
0.0000
0.0000
0.0000
0.1883
0.1080
0.0000
0.0000
0.7504
***
Ri3
Pred.
X it
srit
lrit
p it
g it
r it
Fvalue
R2
AdjR2
Ri2
?
+
+
+
+
+
***
***
*
***
***
Ri4
Coef.
t-value
0.1535
0.0305
0.0008
0.0013
0.0200
0.0250
0.0004
5.0317
0.49%
0.39%
19.4414
2.7868
1.1375
1.0701
3.5407
3.7516
0.0790
0.0000
Sig.
***
***
***
***
Notes:Numberofobservation(N):6,132.Rit:stockreturn,firmiduringperiod1 (ayear),2(ayearandthreemonths),3(a
yearandsixmonths),and4(ayearandninemonths); xit:earnings,firmiduringperiodt; srit:changeofshortrunassets
scalability,firmiduringperiodt; lrit:changeoflongrunassetsscalability,firmiduringperiodt; pit:changeof
profitability,firmiduringperiodt;git:changeofgrowthopportunities,firmiduringperiodt; rit:changeofdiscountrate,
firmiduringperiodt;***significantat1%level,**significantat5%level,*significantat10%level.Linearitytestfor
thismodel13showsthat:(1)WithKolmogorovSmirnovtestshowstvalue9.035andpvalue0.000,andJarqueandBerra
showstvalue15,202.42andchisquare0.000,itmeansthattheresidualsarenotdistributednormally.However,normality
testisignorableforlargedatasamplethatis6,132.Ittendstofollowcentrallimittheorem(Gudjarati2003).(2)Glejsers
testforheteroscedasticityshowsthatallvariableshavesignificanceabove0.05,withtvalue(sig.)xitamountto0.045
(0.964);sritamountto0.045(0.964);lritamountto0.035(0.972);pitamountto0.000(0.990);gitamountto0.067
(0.946);andritamountto0.000(0.990).Thetestshowsthatthedataisfreefromheteroscedasticityproblem.(3)
MulticolinearitytestshowsthatallvariableshaveVIFaboutonewhichmeansthatthereisnocolinearityamongvariables,
VIFvalueforeachvariableis,xitamountto1.731;sritamountto1.086;lrit amountto1.014;pitamountto1.650;git
amountto1.257;andritamountto1.008.
212
Sensitivity Analysis 1:
Categorical Arrangement
Sensitivity Analysis 2:
P/B Partitioning
Subsequently,thisstudyanalyzes
themodelbasedoncategoricaldiffer
entiation.Thisanalysisservestofinda
morefavorabledegreeofassociation.
Model14shouldhaveahighergood
nessoffitwhen,afterdifferentiation,it
hasahigherdegreeofassociationand
isstillconsistentwiththemainvari
ables. The results of categorical ar
rangement for the basic model are
presentedinTable5.
Thisanalysispurportstoidentify
the incremental explanatory power.
Moreover,thecategoricalarrangement
servestoidentifytheinitialsensitivity
such that hypotheses examination is
supported in accordance with the
theory. The categorical arrangement
for Model 14 exhibits that there are
positivedifferences(greaterthanzero)
forthechangesinearningspowerand
growthopportunities. HA1-HA5areac
cordinglysupported,asareModel13
above.Indetails,thechangeinearn
ingspowerforhighgroup(Hqit)has
agreaterdegreeofassociationwitht
valueof16.2990,whichissignificantat
1 percent level, compared to that of
mediumgroup(Hqit).Similarresults
areapplicabletogrowthopportunities.
Model 14 shows a better degree of
associationwithR2of12.34 percent
and adj-R2 of 12.21 percent for Ri1
returntype.Accordingly,Model14has
beenabletobetterexplaintheassocia
tionpowerrelativetothebasicmodel.
Therefore, the ratio between market
valueandbookvalueserveswellwithin
thenextanalysis.
This study organizes the sample

based on P/B ratio arrangement into
fivepartitions(quintiles).Thisquintile
arrangementfunctionstoexaminethe
modelsensitivitynotmerelypredicated
onfirmsinformationstrength,butin
stead based on market strength that
draws investors attention. Such ar
rangementalsoservestoexaminein
vestorrationality,whichislesslikelyto
actwithinstockmispricing.Theresults
of the second sensitivity analysis are
presentedinAppendix1.
Appendix1provesthat earnings
yield (xit), the change in book value
(bit),andthechangeingrowthoppor
tunities(git)arerelatedtothevaria
tion of stock price in various return
types and for all P/B levels. Hence,
hypothesesHA1, HA4andHA5 aresub
stantiated consistently in comparison
withprevious examinations.Hypoth
esis HA2 is supported for Ri1 Ri3
returntypesandhighlevelofP/Bwith
thedegreeofassociationof1 percent,
and for Ri4 return type and high and
mediumhigh levels of P/B with the
degree of association of 5 percent.
Hypothesis HA3 is supported for Ri1
returntypeandmediumhighlevelof
P/B with10 percentsignificancelevel.
The change in pure interest rate
(rit)intheP/Bpartitionbasedmodel
isnegativelylinkedtostockpricemove
ment.Thesupportsareshownforlow
levelofP/BandRi1 - Ri4returntypesat
1 percentsignificancelevel,forlowto
mediumhigh levels of P/Band Ri2
213
Table 5. The Results of Categorical Arrangement for Basic Model Analysis

Var(s)
Ri1
Pred.
?
Xit
+
q it
+
Mqit H>M>0
Hqit H>M>0
b it
+
g it
+
Mgit H>M>0
Hgit H>M>0
r it
F-value
R2
Adj-R2
Ri2
Coef.
t-value
0.6058
0.1219
0.0188
0.0174
0.4895
0.0363
0.0453
0.1477
0.1975
0.0493
95.7330
12.34%
12.21%
18.7617
5.9680
2.1794
0.5442
16.2990
4.0447
4.2684
4.1981
5.5108
5.5458
0.0000
Var(s)
Sig.
Coef.
t-value
Sig.
0.0000 *** 0.1114

0.0000 *** 0.0521
0.0293
0.0114
0.5863
0.2069
0.0000 *** 0.3980
0.0001 *** 0.0217
0.0000 *** 0.0175
0.0000
0.0547
0.0000 *** 0.2392
0.0000
0.0248
***
63.9787
8.60%
8.46%
4.5000
3.3264
1.7297
8.4532
17.2896
3.1501
2.1477
2.0283
8.7095
3.6413
0.0000
0.0000
0.0009
0.0837
0.0000
0.0000
0.0016
0.0318
0.0426
0.0000
0.0003
***
Coef.
t-value
Sig.
0.0000 *** 0.1726

0.0179 **
0.0454
0.1782
0.0074
0.0000 *** 0.1219
0.0000 *** 0.1824
0.0035 *** 0.0230
0.1064
0.0119
0.0000 *** 0.1105
0.0000 *** 0.1505
0.3629
0.0055
***
31.9229
4.48%
4.34%
9.8938
4.1175
1.5931
7.0670
11.2394
4.7548
2.0831
5.8089
7.7714
1.1422
0.0000
0.0000
0.0000
0.1112
0.0000
0.0000
0.0000
0.0373
0.0000
0.0000
0.2534
***
Ri3
Pred.
?
Xit
+
q it
+
Mqit H>M>0
Hqit H>M>0
b it
+
g it
+
Mgit H>M>0
Hgit H>M>0
r it
F-value
R2
Adj-R2
***
***
***
***
***
**
**
***
Ri4
Coef.
t-value
0.1311
0.0297
0.0071
0.2334
0.3096
0.0161
0.0105
0.0978
0.1315
0.0050
46.4409
6.39%
6.25%
6.6248
2.3692
1.3465
11.9242
16.8177
2.9241
1.6150
4.5328
5.9864
0.9099
0.0000
Sig.
***
***
***
***
***
**
***
***
Notes:Numberofobservation(N):6,132.Rit:stockreturn,firmiduringperiod1 (ayear),2(ayearandthreemonths),3(a
yearandsixmonths),and4(ayearandninemonths); xit:earnings,firmiduringperiodt; qit:changeofprofitability,firm
iduringperiodt(inbasicmodelnotatedaspit); bit:changeofbookvalue,firmiduringperiodt;git:changeofgrowth
opportunities,firmiduringperiodt;rit:changeofdiscountrate,firmiduringperiodt;***significantat1%level,**
significantat5%level,*significantat10%level.Categoricalarrangementofprofitabilityandgrowthopportunitieswith
conditions,consecutively,gH>gM>0, andwH>wM>0servestoexaminetheassociationdegreerelatedtoprofitabilityand
growthopportunitiescharacteristics.
214
Ri4 return types at 1 percent signifi

cancelevel,andforRi4returntypeand
mediumhigh level of P/B with the
degree of significance of 5 percent.
Therefore, this study concludes that
HA6issupported,whichindicatesthat
thechangeinpureinterestrateisable
to elevate earnings and investment
scalability,leadingtohigherfirmvalue.
P/Bpartitionbasedmodelshows
thatR2increasesto38.60percent,and
Adj-R2to38.30percentforRi1return
type. Thus, the partition model even
has a better explanatory power than
doesthebasicmodel.Furthermore,the
ratio of market value to book value
worksoutwelltoimprovethemodels
degreeof association.
Discussion
Overall,ouranalysisprovidesevi
dence that six cashflowrelated fac
torsofaccountinginformationarere
lated to stock price variability with
directionsashypothesized.Thisstudy
interprets the accounting information
variables one by one, and suggests
someresearch findings.
Earnings Yields
Earningsyieldispositivelyrelated
tofirmvalue.Theresultsofthisstudy
supporttheclassicalconcept(Ohlson
1995),alongwiththederivativestudies
by Lo and Lys (2000), Francis and
Schipper (1999), Meyers (1999),
Bradshawetal.(2006),CohenandLys
(2006), Bradshaw andSloan (2002),
Bhattacharyaetal.(2003),Collinset
al. (1997), Givoly and Hayn (2000),
Kolev,MarquadtandMcVay(2008),
andWeissetal.(2008).Eventhough
Ohlson(1995)hasaflawwhereearn
ingsisanoisywhenmeasuringmarket
equityvalue,thisstudyconcludesthat
earningsistheprimarydeterminantof
the firms market value. Therefore,
thisstudydenotesthatearningsisthe
measures of value added in account
ing.Furthermore,itsmeasurabilityis
alwaysreflectedinthemarketvalue.
Correspondingwiththeevidence
of earnings being reflected in stock
pricevariability,thisstudyshowsthat
earnings is the fundamental signal
(Ohlson 1995; Feltham and Ohlson
1995,1996).Thisstudycomprehends
thatthefundamentalsignalisdigested
fromitscharacteristicswhichserveas
aliftfor firmperformance.Earnings
serves as a lift for operation perfor
manceaswellasforstockpricevari
ability.Earningsisperceivedbyfinan
cialusersastheprimarydeterminant
of the firms equity value. In other
words,thisstudysupportstheconcept
of recursion theory (Sterling 1968),
suggestingthatfirmvalueisidentified
frombookvalueandearnings.Conse
quently,wesuggestthatthevariation
ofstockpricefullyreflectsbookvalue
andearnings.Finally,thisstudycon
cludes that the association between
accountingearningsandstockpriceis
undeniable.
Investment Scalability and Its

Change
Shortrunandlongruninvestment
scalabilitiescanbeusedasthepredic
tors of market value. The analysis
215
shows that investment scalability is

associated with return. Hence, this
studyconcludesthatshortrunandlong
run assets act as an earnings power.
Consequently, an increase in assets
basically means an increase in the
firmsequity(BaoandBao1989;Cohen
and Lys 2006; Weiss et al. 2008;
Bradshawetal.2006;Abarbanelland
Bushee1997;AbarbanellandBushee
1997;FrancisandSchipper1999).This
studysupportsthenotionthatshortrun
andlongruninvestmentsaretheearn
ings powerandreturn whentheyare
financedwithalowcostofcapital.The
rationaleisthattheincreasesinshort
run andlongrun investments lead to
the enhancement of future earnings
power,whichthenimprovesthefirms
equityvalue.Moreover,theincreases
inshortrunandlongruninvestments
willdecreasethecostofcapital,such
thatthefirmsabilitytopaydividends
will decline. Therefore, investment
scalabilityisassociatedwithstockprice
variabilitydirectlythroughdividendsor
indirectlythroughearningsvariability.
This studysupports theoldcon
ceptthatbookvalueandearningsare
closely related to the firms market
value. Rao and Litzenberger (1971),
andLitzenbergerandRao(1972)for
mulatethatfirmvalueisafunctionof
bookvalueandearnings,butstillad
justable to the function of debt and
changeingrowthopportunities.Analy
sisandinferencesfrompreviousstud
ies showthat our studyconfirms the
adaptationtheory(Wright1967). All
supportedhypothesesindicatethatfirm
assets are modifiable to generate fu
216
turepotentialearnings.Thisstudycon
cludesthatitistheroleofinformation
on financial positionespecially the
roles ofassets andliabilities,but not
equity capitalthat may become a
determinantofstockpricevariability.
Book Value and Its Change

Thisstudyconfirmstherelation
ship between book value and stock
return. This study supports Ohlson
(1995)andLundholm(1995),conclud
ing that book value determines the
firmsmarketvalue.Moreover,Loand
Lys(2000)proposeaconceptthatfirm
value is a function of all discounted
futureearningsanddividends.Dechow,
Hutton,andSloan(1999)reformulate
thereturnmodel,whichwasstillbased
on earnings. Beaver (1999), Hand
(2001),andMyers(1999)verifythat
bookvalueandearnings serveas the
evaluators of market value without
ignoringtheOhlsonsconcept.Within
the same logical and reasoning, this
studyinfersthat accountinginforma
tiononbookvalueimprovesthedegree
ofassociationofthereturnmodel.
Thisstudyimpliesthatthechange
inbookvalueistheprimarymeasure
forthefirmsequityvalue.Thechange
inbookvalueisidenticalwithcurrent
earningsmeasurement.Therefore,the
changeinbookvalueisinaccordwith
thegrowthofequitycapital,andhence
in accord with the change in stock
return (Rao and Litzenberger 1971;
LitzenbergerandRao1972;Baoand
Bao 1989; Burgstahler and Dichev
1997;Collinsetal.1999;Collinsetal.
1987; CohenandLys 2006; Liuand
Thomas2000;Liuetal.2001;Weisset
al.2008;ChenandZhang2007;Ohlson
FelthamandOhlson1996;Bradshaw
etal.2006;andAbarbanellandBushee
1997).
Growth Opportunities
This study supports Rao and
Litzenberger(1971),Litzenbergerand
Rao(1972),andBaoandBao(1972)
thatgrowthopportunitiesincreasefirm
competitiveness. Consequently, the
higher the efficiency, the higher the
productivityis.MillerandModigliani
(1961)suggestthatgrowingfirmsal
wayshaveapositiverateofreturnfor
eachinvestedasset,meaningthatev
eryinvestedresourcehasalowercost
ofcapitalthanthatofotherfirmsinthe
industry.
Thisstudypositsthatfirmvalueis
determinedbygrowthandfuturepo
tentialgrowthopportunities(Liuetal.
2001;Aboodyetal.2002;andFrankel
andLee1998).Currentgrowthdrives
theincreaseinfutureearnings,while
future potential growth reduces the
modelserrortoimprovetheassocia
tion degree of the return model. Lev
and Thiagarajan (1993), Abarbanell
and Bushee (1997), and Weiss et al.
(2008) conclude that the growth of
inventories,grossprofit,sales,accounts
receivable,etc.improvesfutureearn
ings growth.Simultaneously, this re
search concludes that market value

adaptstothegrowthofthosefactors.

This study documents that the
change in discount rate is negatively
associated with annual stock return.
Fromthebeginning,thisstudyhascon
jectured that firm value can be in
creased by the adaptation concept.
Theequityvaluecouldbeincreasedby
adaptingalternativeresourcesthrough
thelowerinterestrate.Consequently,
theinvestedresourcesmanagedbythe
firm would be more productive
(Burgstahler and Dichev 1997).
Aboodyetal.(2002),FrankelandLee
(1998), Zhang (2003) and Chen and
Zhang (2007) argue that earnings
growth is determined by several fac
tors,andoneofthemisinterestrate.In
conclusion, earnings growth is posi
tivelyassociatedwithstockpricevari
ability.
This studys perspective is that
interestrateplaysaroleofmultiplier
effect.Wheninterestratedecreases,a
firmmaygeneratemoreearningssince
thefirmacquiresmoreliabilitiesornew
invested capital such that the firms
weightedinterestratewilldecline(Rao
and Litzenberger 1971; and
Litzenberger and Rao 1972). There
fore, this study infers that the firms
equityvalueishighlydeterminedbythe
expecteddiscountrate(Danielsonand
Dowdell2001;andLiuetal.2001).
217
Model
This study conducts five model
examinationswithtwosensitivitytests.
The results of investment scalability
analysisshowthatModel13hasadjR2 of 2 percent3 percent, which is
higherthanthatofModel12(2%).This
study shows that the newly designed
modelhasabetterdegreeofassocia
tion,andcouldexplainthereturnasso
ciation by 1 percent increase. Next,
this study examines the models by
categoricalarrangementbasedonP/B
ratio.Theanalysisresultsdemonstrate
that adj-R2 is within the range of 6
percent11percent.Thesefindingsin
dicatethatwhensampleisdifferenti
ated categorically into subsamples,
thedegreeofassociationofthereturn
model increases.It is alsonoted that
theincrementalexplanatorypoweris
around9percentcomparedtothatof
thebasicmodel.Theanalysisbasedon
P/B ratio partition confirms that the
modelshowsahighdegreeofassocia
tion with adj-R2 of approximately 5
percent38percent,whichisapproxi
mately 10 percent20 percent higher
thanthoseofthetwopreviousanaly
ses.Uptothisstage,thisstudyisable
toshowabetterdegreeofassociation
ofthereturnmodel.Thus,thismodelis
more comprehensive, realistic, and
accurate.
Research Findings
Theresultsofoverallanalysiscon
firmthetheory,andprovidesomeem
piricalevidence.First,allaccounting
218
fundamentals,assuggestedbytheory,
areconfirmedtoberelatedwithstock
pricevariability.Allcashflowrelated
variables,i.e.,earningsyield,shortrun
andlongruninvestmentscalabilities,
bookvalue,andgrowthopportunities
are positively associated with stock
pricevariability.Meanwhile,thechange
indiscountrateorpureinterestratehas
a negative relation with stock price
variability.Second,thechangeinearn
ingspowerinasinglemeasureisfound
toweaklyexplainstockpricevariabil
ity.Untilrecently,someempiricalevi
dencemeasurestheearningspoweras
asingleunit.Thisstudysplitsthismea
sureintoshortrunandlongruninvest
mentscalabilities,andfindsthatboth
measuresarepositivelyassociatedwith
annualstockreturn.Theexamination
usingP/Bratiopartitionshowsconsis
tentresultsforsubsampleswithlowto
mediumhighP/Bratio.
Third,thisstudycouldsynergize
the adaptation theory (Wright 1967)
with the recursion theory (Sterling
1968). Earnings has explained stock
pricevariabilityforhalfacentury,show
ing that the recursion theory is still
valid.Ontheotherhand,thefindingon
shortrun and longrun investment
scalabilitiesimpliesthattheadaptation
theory is also prevalent. This study
combinesboththeoriesintoonemodel,
andfindsthatboththeoriesindeedhold,
andeventhemodelhasabetterdegree
of association. The recursion theory
thatreliesonearningsandbookvalue
as showninOhlsonsmodel(Ohlson
1995;FelthamandOhlson1995;1996)
iscalledtheorthodoxparadigm.This
fortyyearold paradigm can be re

visedbycomplementingitwithanolder
paradigm, which is the adaptation
theory.Therefore,thisstudycompre
hends that both theories are comple
mentary,notmutuallyexclusive.
Investedresourcecapitalcouldbe
usedtogenerateeithercurrentpoten
tialorfutureearnings.Itistheagents
liabilitiestoelaborateontheusageand
linkage of investedassets. The agent
(management) should disclose infor
mation on their activities or projects
thatcreatewealthforinvestors.Afirm
isalsorequiredtodiscloseinformation
ontheincreaseor thedecreaseofits
liabilities.Rationalinvestorsshouldnot
only harness information related to
earningsandbookvalue,butalsoonthe
characteristics of the firms invest
mentscalabilityonthefinancialstate
ments. The detailed assets show that
investorscouldutilizethemtoperceive
earnings powers.
Fourth,thisstudyfruitfullyveri
fies the relation between accounting
fundamentalsandthevariationofstock
price, and attains a higher degree of
associationthanthatofpreviousstudy
(ChenandZhang2003).Theprevious
studyrecordedahighestscoreofadjR2 ofapproximately20 percent,which
camefromsubsamplepartition.This
studyachievesahigherresultusingthe
subsamples,whichisintherangeof7
percent38 percentforP/Bratiopar
tition.Fifth,wefindandconfirmthat
accountingfundamentalsarerelatedto
stock price variability in crosssec
tionalstockreturn.Thisstudysubstan
tiates the strong association between
accounting fundamentals and stock

price variability. Besides, this study
suggeststhatnotonlyshouldearnings
bedisclosedimmediatelytoinvestors,
but invested assets also need to be
informedtothepublic.Thetimeliness
and comprehensiveness of the firms
disclosuretothecapitalmarketscould
reduce the anomaly of stock price
variability.Suchapolicyisexpectedto
repressfirmvaluedeviation.
Sixth,confirmingtheassociation
betweenthesixcashflowrelatedfac
tors and stock price variability, this
studypinpointsthatinvestorstrading
strategy should revert to accounting
fundamentals,andthattheycouldrely
on them. This perspective complies
withcurrenttendencyofstocktrading
strategyinthemidst ofstockmarket
fluctuationandeconomicuncertainty.
Thisstudyconcludes thataccounting
fundamentals,i.e.,assets,bookvalue,
earnings,etc.,arethemainfactorsthat
explainfirmvalueorreturn.
Conclusion and Limitations

Conclusion
Thisstudysummarizestheanaly
sisresultsinthefollowingconclusion.
Earningsyieldandbookvalueareposi
tivelyassociatedwithfirmvalue.Short
runandlongruninvestmentscalabilities
may serve as the prime determinants
ofstockpricevariability,indicatingthat
shortterm and longterm assets are
capitalizedontogeneratepotentialfu
tureearnings.Growthopportunitiesare
also associated with the variation of
219
stockprice.Inotherwords,stockprice
adjusts to growth opportunities. The
change in discount rate is negatively
relatedto annualstock return, which
stems fromthe use ofcheap alterna
tiveresources orlowerinterestrates.
All examination results confirm the
hypothesized directions. In addition,
thesensitivitytestbasedonP/Bratio
showssimilarresults.Thisstudydeliv
ers abetterdegree ofreturnassocia
tion.Althoughthisparticularfindingis
comparablewiththatofpreviousstudy,
whichshowsalowdegreeofrelation,
this studycontributes an incremental
explanatorypower.
Theassociationbetweenaccount
ingfundamentalsandthevariationof
stockpricecategorizedbyP/Bratiois
confirmed as suggested by theory.
Specifically,highandmediumhighP/
Bratioscouldexplainstockpricevari
abilitybetterthandoeslowerP/Bratio.
Withinthetheoreticallevel,thisstudy
findsempiricalevidenceofthesynergy
betweentheadaptationtheoryandthe
recursiontheory.Therefore,investors
shouldnotmerelyuseinformationre
latedtoearningsandbookvalue,but
theyshouldanalyzethecharacteristics
of investment scalability or invested
resources.
This study documents a higher
degree of association between stock
pricevariabilityandaccountingfunda
mentalsthandopreviousstudies.The
relationhasmoresignificantresultsin
thesubsamplepartition,especiallywith
P/Bratio.Overall,thefindingsleadto
conclusionthattherelationofaccount
inginformationtostockpricevariabil
220
ityis statisticallyconfirmed. Inaddi

tion,thisstudysuggeststhatinvestors
trading strategy revert to accounting
fundamentals.
Limitations
Thisstudyhassomelimitationsas
follows. First, it uses a large data
samplesothatitsAdj-R2islowdueto
thelawoflargedatasample.Second,
thisstudyhasasurvivorship biasinits
sample.Ofall24,095firmyears,this
study only uses 6,132 (25.45%) be
cause the remainders are un
analyzable.Third,thisstudydoesnot
employfirmswithnegativebookval
uesandnegativeearningsaftertaxes,
asitusespurposivesamplingcriteria.
Future researchers should consider
employingthemasthecontrolgroup.
Because of their unavailability, this
studyfailstoconductrobustnesschecks
forthisgroup.Fourth,thereisabias
duetotheblendingofallstockmarkets,
from semistrong to weak forms of
efficiency.Althoughthislimitationis
deniable by the marketwide regime
concept,thisstudyignoresthecharac
teristicsofeconomies,regulations,trad
ing mechanisms, and cultures across
countries. In fact, those factors may
affectthereturnmodel.
Fifth,thisstudyusesearningsaf
tertaxes,andsoitdisregardsearnings
quality, which may affect the return
model.Nevertheless,thisissueis not
influentialasthesampletendstoshow
alow P/Bratio. This means that the
sampleusuallyhasgoodearningsqual
ity.Sixth,thisstudydoesnotconsider
conservatisminthepublishedfinancial
reports where assets are frequently

disclosedlowerthantheirrealfigures.
Thisexanteconservatismmayaffect
thereturnmodel.Also,thisstudydoes
not consider the conservatism level.
Seventh, investment scalability mea
surementisweaksinceitonlyconsists
of current assets, fixedassets, short

termliabilities,andlongtermliabilities.
Thisstudyignoresthepossibilitythat
there may be some reserves or con
structioninprogressoperatingimmedi
ately.
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224
APPENDIX 1
The Results of Inducing the Change in Investment Scalability Analysis
Ri1
o w
P B
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
Ri2
Coef.
t-value
Sig.
0.9262
3.6746
0.0002
0.0306
0.0414
0.7296
1.9473
26.3673
15.2294
0.0892
2.0497
2.6972
9.9661
9.4720
56.8679
21.86%
21.47%
0.0000
0.0000
0.9289
0.0406
0.0071
0.0000
0.0000
0.0000
Coef.
***
***
***
***
***
0.8079
0.8236
0.0006
0.0198
0.0293
0.0601
1.2520
25.2705
3.7505
0.3446
1.4573
2.1012
0.9018
6.6911
11.7171
5.45%
4.98%
Ri1
P B
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
t-value
Sig.
0.0000
0.0002
0.7305
0.1453
0.0358
0.3673
0.0000
0.0000
***
***
**
***
***
Ri2
Coef.
t-value
Sig.
0.4863
0.5175
0.0008
0.0187
0.0175
0.0061
0.8871
9.2309
4.34%
3.87%
18.5310
2.8714
0.5967
1.6717
1.5289
0.1121
5.7763
0.0000
0.0000
0.0042
0.5509
0.0948
0.1265
0.9107
0.0000
***
Coef.
***
***
***
t-value
Sig.
0.2146 9.5104 0.0000 ***

0.6577 4.2440 0.0000 ***
0.0008 0.7097 0.4780
0.0176 1.8374 0.0664
0.0136 1.3792 0.1681
0.0756 1.6071 0.1083
0.5965 4.5176 0.0000 ***
8.2587 0.0000
***
3.90%
3.43%
225
L o w - M e d i u m
P B
L o w - M e d i u m
P B
Continued from APPENDIX 1
226
Ri1
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
Ri2
Coef.
t-value
Sig.
0.9273
0.1362
0.0055
0.0041
0.0517
0.7051
0.0479
13.7341
6.33%
5.87%
27.1602
2.2081
1.0154
0.4881
1.0571
8.4779
0.7671
0.0000
0.0000
0.0274
0.3101
0.6256
0.2907
0.0000
0.4432
***
***
**
***
Coef.
t-value
0.4944
0.1212
0.0022
0.0046
0.0740
0.4950
0.0464
13.7660
6.35%
5.88%
20.1531
2.7338
0.5594
0.7620
2.1054
8.2823
1.0332
0.0000
Ri1
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
Sig.
0.0000
0.0064
0.5760
0.4462
0.0355
0.0000
0.3017
***
***
***
**
***
Ri2
Coef.
t-value
Sig.
0.2299
0.1147
0.0035
0.0000
0.0808
0.2773
0.0938
9.3563
4.40%
3.93%
11.6663
3.2218
1.1290
0.0072
2.8596
5.7771
2.6034
0.0000
0.0000
0.0013
0.2591
0.9942
0.0043
0.0000
0.0093
***
Coef.
***
***
***
***
***
t-value
Sig.
0.0922 5.1260 0.0000 ***

0.1810 5.5703 0.0000 ***
0.0053 1.8672 0.0621
0.0010 0.2176 0.8278
0.1315 5.1021 0.0000 ***
0.2252 5.1386 0.0000 ***
0.0638 1.9401 0.0526 *
11.4706 0.0000
***
5.34%
4.88%
M e d i u m- M e d i u m
P B
Ri1
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
Ri2
Coef.
t-value
Sig.
0.5106
1.0372
0.0072
0.0060
0.0226
0.8992
0.0213
44.6507
18.01%
17.60%
17.1578
13.2985
1.1376
0.7466
1.0891
10.0492
0.7259
0.0000
0.0000
0.0000
0.2555
0.4554
0.2763
0.0000
0.4680
***
Coef.
***
***
0.1834
0.5999
0.0062
0.0123
0.0227
*** 0.7072
0.0118
40.0357
16.45%
16.04%
M e d i u m- M e d i u m
P B
Ri1
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
t-value
8.9008
11.1093
1.4053
2.2334
1.5800
11.4168
0.5816
0.0000
Sig.
0.0000
0.0000
0.1602
0.0257
0.1144
0.0000
0.5609
***
***
***
***
Ri2
Coef.
t-value
Sig.
0.0236
0.3527
0.0040
0.0046
0.0052
0.3908
0.0421
23.7174
10.45%
10.01%
1.5134
8.6174
1.1825
1.0887
0.4738
8.3219
2.7392
0.0000
0.1304
0.0000
0.2372
0.2765
0.6357
0.0000
0.0062
***
Coef.
t-value
Sig.
0.0716 4.9097 0.0000 ***

*** 0.3531 9.2338 0.0000 ***
0.0064 2.0561 0.0400 **
0.0077 1.9811 0.0478
0.0219 2.1477 0.0319 **
*** 0.3735 8.5146 0.0000 ***
*** 0.0364 2.5338 0.0114 **
26.9835 0.0000
***
11.72%
11.28%
227
Ri1
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
Coef.
?
+
+
+
+
+
0.2714
1.6294
0.0010
0.0030
0.0258
0.2448
0.0279
127.7231
38.60%
38.30%
M e d i u m - H i g h
Coef.
228
Ri2
t-value
Sig.
11.2791
21.2164
0.4065
1.7680
1.9758
4.8097
1.8392
0.0000
0.0000
0.0000
0.6844
0.0773
0.0484
0.0000
0.0661
***
Coef.
***
***
*
**
***
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
t-value
Sig.
0.0796 4.6595 0.0000 ***

0.9001 16.5045 0.0000 ***
0.0005 0.2814 0.7784
0.0017 1.4319 0.1524
0.0126 1.3570 0.1750
0.0825 2.2821 0.0227 **
0.0082 0.7566 0.4494
70.0659 0.0000
***
25.64%
25.28%
Ri1
P B
M e d i u m - H i g h
P B
Ri2
Coef.
t-value
Sig.
0.1066
0.5053
0.0008
0.0008
0.0059
0.0192
0.0331
34.7146
14.59%
14.17%
8.0359
11.9339
0.5618
0.8013
0.8180
0.6838
3.9548
0.0000
0.0000
0.0000
0.5744
0.4231
0.4135
0.4942
0.0001
***
Coef.
***
***
***
t-value
Sig.
0.1325 10.0345 0.0000 ***

0.3746 8.8874 0.0000 ***
0.0010 0.7710 0.4409
0.0010 1.1049 0.2694
0.0035 0.4878 0.6258
0.0195 0.6972 0.4858
0.0208 2.4959 0.0127 **
20.1725 0.0000
***
9.03%
8.58%

Ri1
g h
P B
Coef.
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
Ri2
Coef.
t-value
Sig.
0.4335
0.0938
0.0053
0.0047
0.0359
0.0688
0.0247
19.6192
8.81%
8.36%
21.6449
4.1453
4.5853
1.4485
2.2089
6.8601
3.2440
0.0000
0.0000
0.0000
0.0000
0.1477
0.0274
0.0000
0.0012
***
Coef.
P B
h
g
i
H
Pred.
X it
srit
lrit
pit
git
rit
Fvalue
R2
AdjR 2
?
+
+
+
+
+
Coef.
Sig.
***
***
***
0.1444 9.8993 0.0000 ***

0.0403 2.4450 0.0146 **
0.0039 4.6269 0.0000 ***
0.0026 1.1144 0.2653
**
0.0173 1.4596 0.1447
*** 0.0430 5.8899 0.0000 ***
0.0110 1.9782 0.0481

11.3087 0.0000
***
5.27%
4.81%
Ri3
Coef.
t-value
Ri4
t-value
Sig.
0.1275 12.4631
0.0259
2.2394
0.0019
3.1430
0.0007 0.4333
0.0162
1.9544
0.0237
4.6342
0.0013 0.3272
5.7043
0.0000
2.73%
2.25%
0.0000
0.0253
0.0017
0.6649
0.0509
0.0000
0.7435
***
Coef.
***
**
***
*
***
t-value
Sig.
0.1729 17.6318 0.0000 ***

0.0243 2.1922 0.0286 **
0.0014 2.3871 0.0171 **
0.0019 1.1925 0.2333
0.0186 2.3316 0.0199 **
0.0269 5.4863 0.0000 ***
0.0019 0.5116 0.6090
7.1771 0.0000
***
3.41%
2.94%
Additional Notes:Numberofobservation(N)forLowPB:1,227,LowMediumPB:1,226,
MediumMediumPB:1,227,MediumHighPB:1,226,HighPB:1,226.ThelimitsofeachPB:
LowPB<0.3065;LowMediumPB<0.5462;MediumMediumPB<0.8505;MediumHigh
PB<1.3687,HighPB>1.3687.
229

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Sumiyana etal.

AccountingFundamentalsandthe VariationofStock Price

ACCOUNTING FUNDAMENTALS AND

This study develops a new return model with respect to

been examined by Burgstahler and

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

This study is mainly focused on

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

assets as the stimulus for increasing

Literature Review, Models

first time, which is afterwards re

ings qualityimproves returnassocia

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

other empirical models. Francis and

direct labor costs to measure short

Changes in Discount Rate

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

and Wahlen (2000). Their modifica

est rate. It serves as an adjustment

A Model of Equity Value

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

A Model of Stock Return

Substituting Equation (3) into

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

current earnings). Earnings yield is

Short-run and Long-run

run and longrun investments could

Because in the beginning Bt-1/Vt-1 is

Changes in Book Value

HA4: The change in book value is

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

than zero and C(srt) and C(lrt) are

Changes in Discount Rate

Variables Measurement and

This study is expected to over

Bit 1 ) / Bit 1 ](1 Bit 1 / Vit 1 ) isbook

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

) Bit 1 / Vit 1 isthechangeindiscount

srit (srit srit 1 ) / srit 1 ( Bit 1 / Vit 1 )

))( g it g it 1 ) Bit 1 / Vit 1 isthechangein

The First Sensitivity Analysis

is the change in srit adjusted by the

withM and H represent groups with

The Second Sensitivity

Analysis, Discussion, and

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

Table 2. Descriptive Statistics

Median Std. Dev. Perc. - 25 Perc. - 75

in profitability with such movement

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

all expected values. In addition, this

Analysis of Chen and Zhangs

Table 3. The Results of Basic Model Analysis

Notes: Numberofobservation(N):6,132.Rit:stockreturn,firmiduringperiod1 (ayear),2(ayearandthreemonths),3(a

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

Table 4. The Results of Investment Scalability Model Analysis

0.0000 *** 0.4430

0.0000 *** 0.0416

Sumiyana etal.AccountingFundamentalsandthe VariationofStock Price

This study organizes the sample

Table 5. The Results of Categorical Arrangement for Basic Model Analysis

0.0000 *** 0.1114

0.0000 *** 0.1726