In the September/October 1979 issue of this journal, Easman, Falkenstein, Weil and Guy presented evidence to support the claim that changes in sustainable net income (historical cost net income less realized holding gains) correlate better with annualized stock return than changes in reported historical cost net income. This article reexamines that claim using, primarily, SEC replacement cost data for 1976–78 derived from Accounting Series Release No. 190 and, secondarily, inflation adjusted earnings for 1972–77 published by Duff and Phelps’ Inflation Accounting Research Service.

The basic result is that current replacement cost (sustainable) income provides no incremental explanatory power, given historical cost earnings. However, the converse does not hold. In other words, historical cost earnings explain variation in stock return beyond that accounted for by replacement cost income. These findings are consistent with the contention that replacement cost income may be perceived as a garbled version of historical cost earnings.