Research on the Predictive Ability of Financial Information for Future Earnings: Critical Review and Future Prospects
Carmelo Reverte Maya
In this paper we provide a critical review of one of the most important areas within market-based accounting research: the usefulness of financial information for earnings prediction. We also carry out an analysis of the current situation of this line of research as well as an assessment of its future prospects. The main conclusion of our study is that this area has moved away from a secondary role within market-based accounting research towards a crucial one, especially after the appearance of the Ohlson (1995) and Feltham and Ohlson (1995) accounting-based valuation models. Recent studies in this area include stock prices in addition to accounting data as earnings predictors in order to mitigate the insufficiency of the accounting system in capturing value-relevant events with implications for future earnings in a timely way. Possible future developments in this line of research might be aimed at determining what other type of information not reflected in the financial statements could be useful for predicting future earnings and therefore could be responsible for the predictive ability of security prices. Likewise, another interesting research area is that examining whether the predictive ability of financial information varies depending upon the accounting and institutional differences among accounting systems.
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