The Earnings-Returns Relation Under The Presence Of Non-Linearity And The “Prices Leading Earnings” Assumption: The Greek Case.

A large body of accounting research in the past has documented the existence of non linearity in the return-earnings relation and also the fact that stock prices lead earnings which means that information reflected in stock prices is more value relevant than the past series of earnings. The aim of this paper is to examine the “prices leading earnings” assumption, as well as the existence of non-linearity on the earnings-return relation in the Hellenic capital market, as means of reducing the downward bias in ERCs. For this reason we employed regression tests using leading returns and earnings over an 11 year period (1994-2004) firstly in a linear form and secondly using a non-linear quadratic form. Results suggested that prices do lead earnings in the Greek capital market and non-linearity is present in the return-earnings relation, but the most interesting result is that the simultaneous incorporation of non-linearity and leading period returns in the return-earnings regression models yields higher and more significant earnings response coefficients.