Inflation-adjusted accounting data mandated by the Financial Accounting Standards Board’s Statement No. 33 have the potential to provide valuable information on inflation’s impact on income and stock returns. In particular, these data can reflect the effects of inflation on certain assets, such as inventory, property, plant and equipment, that are not treated explicitly by historical cost measures.
Do Statement No. 33 data provide information that historical cost earnings do not? The authors calculated cross-sectional correlations between actual stock returns and seven earnings variables—historical cost earnings plus six Statement No. 33 income measures. The results indicate that historical cost earnings dominate the other earnings measures.
In particular, knowledge of Statement No. 33 data does not significantly increase the ability of historical cost earnings to explain stock returns. In contrast, historical cost earnings do add to the explanatory power provided by the FASB’s data.