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2017 | OriginalPaper | Chapter

Examining the Relationship between the Stock Returns and Earnings Measures – Evidence from Borsa Istanbul

Authors : Asil Azimli, Pınar Evrim Mandaci

Published in: New Challenges in Banking and Finance

Publisher: Springer International Publishing

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Abstract

This paper investigates the relationship between stock returns and different types of earnings measures (such as net income, gross profits, operating profitability, cash-based operating profitability and accruals) for the firms traded on Borsa Istanbul. We construct portfolios by sorting firms according to the implied earning measures from low to high and analyze whether there are differences among them. Our sample period is from June 2007 to December 2015 covering 172 firms in average. Our results consistent with the previous studies indicating the profitability of equally and in some cases value weighted extreme portfolio investment strategies based on earnings measures.

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Risk free rate is in U.S. dollars in order to eliminate the impact of inflation of Turkish Lira.

In scaling earnings measures we used total book assets of December t − 1 for all the variables. Use of consistent deflator among different variables that is to be examined in explaining expected returns is important (see, Ball et al. 2015).

According to Ball et al. (2015) reducing operating profitability with research and development expenditures is not appropriate, since such items reported as they are incurred. However, firms bear research and development costs in order to generate future revenues.

See, for instance, Fama and French, (2008), Novy-Marx (2013) and Rouwenhorst (1999).

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Title: Examining the Relationship between the Stock Returns and Earnings Measures – Evidence from Borsa Istanbul
Authors: Asil Azimli
Pınar Evrim Mandaci
Publisher: Springer International Publishing
Book: New Challenges in Banking and Finance
Print ISBN: 978-3-319-66871-0

Electronic ISBN: 978-3-319-66872-7

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-66872-7_6