Financial market data vs. accounting data: Who explains best stock returns?

In this paper we compare financial data with accounting data and the way that they affect stock prices and returns. Especially we focus on the effect of financial market data and accounting data separately in the two periods before and after 2008 to examine the effect before and after the financial crisis. Generally stock returns are affected by different conditions in the stock market, that are depicted in financial data (market return, risk-free rate), and also by firm-specific characteristics depicted in the firms’ accounting data.

In this paper we try to find out which information has the dominant role in the configuration of stock prices. Investors are mainly affected in their decisions by the general market conditions (market climate) and by the financial conditions of companies. Also the accounting data are important and must be analyzed by investors.

In this research we estimate share prices based on financial data using the capital asset pricing model (CAPM) and estimate share prices basing on accounting data using the Ohlson model.

We test the results of both methodologies comparing the estimated share prices with the actual ones. The greater the correlation (the less the difference), between the two variables, the better (the less) the explanatory power of the model’s data on stock prices.

Our sample consists of S&P 500 firms because investments in such companies can be considered predominantly chosen by investors. Our analytic period is 2002-2014 and we also focus on sub periods before and after 2008, the year of the global financial crisis. We examine changes after the crisis.