MODELING THE TIME-SERIES VARIATION OF EARNINGS RESPONSE COEFFICIENTS IN THE FINNISH STOCK-MARKET

Most of the empirical studies modelling the association between stock returns and accounting earnings assume a homogeneous return-earnings r elation across firms and over time. However, in recent years some stud ies have reported that this association significantly varies across fi rms and also over time. Whether macroeconomic factors explain the inte rtemporal variation of earnings response coefficients (ERCs), i.e. the slope coefficients between stock returns and corporate earnings in th e Finnish stock market is studied. In the theoretical part of the stud y it is shown that there exists a relationship between macroeconomic v ariables affecting future cash flows/dividends or pricing operator and the intertemporal variation of earnings response coefficients. The em pirical analysis reveals some time-series variation of ERCs in the Fin nish stock market. A significant proportion of this variation is obser ved to be due to the changes in the underlying macroeconomic character istics.