This study provides further insights into factors contributing to differential
ERCs in an annual association study context. In contrast to the previous work,
we examine temporal as well as cross-sectional determinants of ERCs. The
temporal variation in ERCs is hypothesized to be negatively related to the
risk-free interest rate. We expect cross-sectional variation in ERCs to be
positively related to earnings persistence and negatively related to firm’s
systematic risk. In addition, we hypothesize that ERCs are positively related to
growth opportunities that are not likely to be fully captured by persistence
estimated using time series models. Our empirical results are consistent with
all these predictions.