TY  - JOUR
AB  - The fundamental relationship between accounting variables and firm valuation is a recurring theme in capital market research. This paper investigates this relationship within a balance sheet context and highlights the importance of controlling for relevant economic factors. We do this by conditioning explanatory power on the firm's relative financial leverage position, after controlling for cashflows and firm size, and using an arctan regression model to take account of temporary components in cash and earnings flows. Using data for 743 firm‐years for Australian Stock Exchange listed stocks, we find that for firms which are ‘above optimal leverage’: (i) earnings contain a greater level of transitory items, particularly when firm size is small; and (ii) cashflows provide higher incremental information. Our results are consistent with investors perceiving earnings as progressively less informative as the probability of failure increases, and the likelihood of earnings manipulation for the purpose of reducing proximity to debt covenants increases.
VL  - 12
IS  - 2
SN  - 0114-0582
DO  - 10.1108/eb037952
UR  - https://doi.org/10.1108/eb037952
AU  - Hodgson Allan
AU  - Stevenson‐Clarke Peta
PY  - 2000
Y1  - 2000/01/01
TI  - Accounting Variables and Stock Returns: The Impact of Leverage
T2  - Pacific Accounting Review
PB  - MCB UP Ltd
SP  - 37
EP  - 64
Y2  - 2024/04/19
ER  -