The Information Content of Earnings and Prices: A Simultaneous Equations Approach
By Mary Lea McAnally, William H. Beaver, Christopher H. Stinson
Journal of Accounting and Economics, Vol. 23, #1, pp. 53-81
The price-earnings relation can be characterized as a system of simultaneous equations. Earnings and prices can behave as if they are both endogenously determined because they are jointly affected by a mix of information that is difficult to specify explicitly. Initial specification tests are consistent with both earnings changes and price changes being endogenous. The coefficients increase in moving from OLS to 3SLS and provide less different estimates of the underlying parameters, under a restricted set of assumptions. The evidence is consistent with the contention that a substantial portion of the bias can be mitigated via joint estimation.