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The Information Content of General Price Level Earnings: A Reply.

Josef Lakonishok^1,2; Aharon R. Ofer^3,4

¹ Professor of Finance and Accounting, Tel Aviv University. 1 · ² Cornell University 2 · ³ Associate Professor of Finance, Tel Aviv University. 3 · ⁴ North- Western University. 4

The article presents information on content of general price level earnings. The criticism of the use of a binomial test in which the author compare the number of cases in which the General Price Level (GPL) correlation coefficients exceed the historical cost (HC) coefficients, are correct. The problem with the test is that the observations are not independent. The results clearly indicate that, in the tests that we conducted, GPL earnings outperfouued HC earnings. The authors present results for the difference between GPL correlations and HC correlations. Based on the results in this table, the conclusions of this paper are criticized. The test is performed for three earnings ratios-net income to common equity, net income to market value of common equity and net income plus depreciation to market value of common equity. In addition, the test is performed for three portfolio sizes-individual securities, portfolios of five securities and portfolios often securities. The results for two out of the three earnings definitions, reveal that GPL earnings outperform HC earnings at the five percent significance level.

DOI

10.2308/tar-4491888

Volume

60 (4)

Pages

711-713

Language

en

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