Threshold analysis for signalling effect of earnings on stock returns

Abstract

[[abstract]]This paper employs the panel data threshold regression model (Hansen, 1999) to estimate the explanatory power among the return on equity (ROE), earnings per share (EPS), growth ratio of return on asset (ROA), retained earnings to equity ratio, and growth ratio of gross margin with a 10-year sample of 283 firms. In this model, we examine the threshold effects of EPS on stock returns of listed firms and analyze the relationship between ROE and stock returns within the different regimes of EPS. The empirical result shows that lagged EPS, ROE, ROA growth ratio, and retained earnings to equity ratio are statistically significant to stock returns. Taking EPS at time t-1as the threshold variable, we conclude that there is strong evidence that there are two thresholds and three regimes in the threshold regression