Fundamental information analysis: An extension and UK evidence

This paper reports a replication and extension of the Fundamental Information Analysis of Lev & Thiagarajan (1993). Using data for a large sample of UK companies we examine the improvements in explanatory value that are achievable by allowing for both macro-economic state and industry variation in the response parameters of non-earnings signals. We interpret this evidence as a test of the beliefs of previous researchers who have suggested that the influence of non-earnings signals is likely to be more conditional than the influence of earnings. In particular we find that the most informative non-earnings signals are those relating to the operating margins and/or cost management of the firm. The final section of the paper reports the UK evidence for the existence of an inverse relation between the Lev & Thiagarajan measure of earnings quality and earnings response coefficients. In contrast to Lev & Thiagarajan we find no significant relation for UK companies. © 1999 Academic Press.