Essays on the determinants of the relation between stock prices and accounting earnings

This dissertation is composed of three essays on the determinants of the relation between stock prices and accounting earnings. The title of the first essay is "Price Earnings Ratios and Earnings Growth: An Empirical Investigation." This paper contains evidence of a significant relation between the earnings-price ratio and future earnings growth. Prior research documents little relation between the earnings-price ratio and future earnings growth because the accounting earnings used in the studies contain a noise term which weakens the relation between these two financial variables. However, this paper shows that taking a moving average of past accounting earnings reduces the strong influence of the noise term and provides significant correlation between the aggregate earnings-price ratio and earnings growth. The second essay is "Auditor Size and the Earnings Response Coefficient." This study empirically examines whether the size of audit firms affects their clients' earnings response coefficients. It is maintained that auditor size and audit credibility is positively correlated. Controlling for size and industry, the 63 Big Eight clients in my sample tend to have larger earnings response coefficients than those of the 63 non-Big Eight clients which suggests that Big Eight clients' earnings numbers are perceived to be more credible. The title of the third essay is "Audit Qualification and Price-Earnings Relation." It has been maintained that accounting information associated with audit qualifications is generally considered less reliable than that with unqualified audit opinions. This essay compares the average earnings response coefficient of 96 sample firms during the years when they receive subject-to qualifications with the average response coefficient of the same firms in years when they receive unqualified opinions. The empirical results support the hypothesis that accounting information with audit qualifications is considered less reliable than that with unqualified audit opinions. This paper has some implications on the Statements on Auditing Standards No. 58.