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Abstract:
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This dissertation builds upon one of the foundation articles in Fundamental Analysis , written by Abarbanell and Bushee [1997] (AB -97 ) , that studied the relationship of fundamental signals (combinations of items reported in the financial statements ) to future accounting earnings during 1983 -1990 . Guided by fundamental financial and managerial /cost accounting concepts , this study adds fundamental signals to the AB -97 earning -signals model . The added fundamental signals include proxies for operating leverage , market share , markup , and total manufacturing costs . A revised ("Experimental" ) long -term growth variable is introduced that allows for negative EPS (loss ) values in the geometric mean growth rate computation . The expanded model is used to analyze the earnings -relevance of the studied fundamental signals during 1991 -2008 , and the results for each of the AB -97 signals as well as each of the added signals are evaluated . The AB -97 methodology for analyzing security analysts' efficient use of the fundamental signals is modified to express utilization efficiency as a percent , and analysts' actual forecast error rates are computed and compared to the analysts' utilization percents . The results include the finding that the operating leverage proxy is a consistently significant and important predictor of long -term growth , giving rise to the recommendation that GAAP requires firms to report an estimate of their annual total fixed costs , or at least that manufacturing firms report their total annual manufacturing overhead costs . Hierarchical regression results indicate that the added fundamental signals provide significant incremental explanatory /predictive power above that provided by the AB -97 fundamental signals that were based on the guidance of security analysts . Also , the results provide marginal support for analysts' efficient use of the fundamental signals in making their one -year -ahead EPS forecast revisions having increased after EDGAR in 1996 and after Regulation FD in 2000 . |