High growth firms show strong correlation between earnings and returns, study finds.
The correlation between a company's earnings and its stock returns is influenced by factors beyond just earnings. When current earnings are related to expected future earnings or other future-oriented information, they have a strong impact on stock returns. Companies with high price-earnings ratios and high return on equity tend to experience earnings growth, leading to a positive correlation between their earnings and future earnings. By focusing on specific characteristics, it is possible to identify companies whose earnings are closely linked to their stock returns.