A Matter of Principle: Accounting Reports Convey Both Cash-Flow News and Discount-Rate News

This appendix provides a contrast to the variance decomposition approach for identifying the two types of news in accounting data. This approach, explained in Callen (2009), assumes the Vuolteenaho (2002) model, implemented in a vector autoregressive (VAR) scheme to capture the linear dependencies among multiple time series of indicator variables. Book-to-price and (book) return of equity (ROE), along with past stock returns, are the conditioning information for the determination of the expected-return news and cash-flow news components of stock returns, although subsequent papers expand the information set. This section compares this approach with ours.