The Articulation of Returns and Accounting-Related Variables when Returns Lead Earnings: UK Evidence

This paper constructs a simple setting in which economic returns always lead accounting earnings. It then uses this setting to explore analytically the likely effect of 'returns leading earnings' on the properties of the market-to-book ratio, accounting profitability, the price-earnings ratio and profitability persistence. The analysis predicts that 'returns leading earnings' will tend to drive up the level of each of the three accounting-related ratios and will generate certain patterns of association between those ratios. Analysis of data from a sample of UK companies supports many of the predictions. Copyright Blackwell Publishers Ltd 1998.