What Information in Financial Statements Could Be Used to Predict the Risk of Equity Investment?

Theoretically, accounting earnings could be used to estimate the intrinsic value of equity. If predicted accurately, then, so equity, thereby, creating much less risk in equity investment. However, surprises are common, and therefore is To quantify investment implied from earnings, I propose use financial statements construct abnormal sales growth rates (ABG) changes profit margins (ABPM) measure uncertainty embedded earnings. ABG as difference between current rate (profit margin) its benchmark, a weighted three preceding years’ margin). Then, whether what extent news ABPM material enough change expected (proxied by analysts’ forecasted revisions [FREV] unexpected [UE], future stock returns [SAR]). Fama–MacBeth regression results show that, together, solely explain 8.2% (2.3%) (5.4%) variation FREV (UE) (SAR). The risk-predictability robust presence net operating assets accruals quality, which, suggested previous literature, might influence Further contingent analyses indicate that capital market reacts more strongly bad ABPM/ABG (with negative signs) than good positive signs).