A Structural Break in the Aggregate Earnings–Returns Relation

This study empirically estimates the date of the structural change in the aggregate earnings–returns relation and reports it as the fourth quarter of 1991. We identify three sources of the structural change: (i) an increase in the relative importance of cash flow news contained in stock returns; (ii) a decrease in the importance of discount rate news contained in aggregate earnings; and (iii) a decrease in the persistence or the predictability of aggregate earnings and returns. Next, we examine the components of aggregate earnings and find that the change in the aggregate earnings–returns relation is largely driven by intertemporal changes in aggregate inventory accruals, suggesting the structural change is attributable to improved inventory management systems.