Accounting Structure-based Fundamentals and the Ability of Stock Returns to Reflect Future Earnings

This study examines the relationship between accounting structure-based fundamentals and invest or informational efficiency. These fundamentals play a crucial role as predictors of future earnings. However, they are based on changes in net operating assets, which reflect the complexity of fundamental variables. This complexity can hinder investors from accurately interpreting these variables. To address this, the study introduces the concept of an Aggregate Fundamental Score (AFS) which combines derivative components from the growth of net operating assets. This study investigate whether AFS relates with the ability of stock returns to anticipate future earnings, by examining future earnings coefficients (FERCs). The research focuses on firms listed on the KSE from 2010 to 2020, utilizing a series of regression analyses. The findings reveal a positive association between higher AFS and greater FERCs. Remarkably, the influence of the aggregate fundamental score (AFS) on FERCs surpasses that of individual fundamental variables. This result holds even for companies that are followed by financial analysts, who serve as an alternative information channel. This implies that enhanced structural consistency among fundamental variables regarding future earnings increase, denoted by a high AFS, enables investors to more effectively grasp the future earnings implicit in current financials. In turn, this leads investors to reduced costs, lower risks, and a more efficient response to accounting information. This study holds both academic and practical importance, underscoring the significance of comprehending not only the accounting system but also conducting financial statement analysis in corporate valuation.