Earnings Response Coefficient Models: Synthesis and Extensions

Abstract

We provide a rigorous and comprehensive set of derivations of earnings response coefficient models in levels and changes forms. Reverse return coefficient models are also derived. The models all are variants on the present value of dividends model of stock prices. Most of these models do not appear in the literature or appear only implicitly. We start with the simplest 100 percent payout model and work up to IMA (1,1) processes for earnings. We also model the case in which the information set is more than earnings. The approach introduced in this article provides a firm basis for further extensions.