Accounting and finance have a long tradition of studying the relation between accounting earnings and stock market returns. This interest is driven by the importance of earnings to investment decisions and to the prediction of returns. In their asset allocation decisions, investors form expectations about the firm’s future cash flows and the risk associated with these cash flows (Fama 1970). As earnings contain information about the stream of cash flows, investors use earnings information to revise their expectations about future flows and this leads to a revision of stock prices. In other words, earnings are useful for stock price formation. Prior studies have focused on explaining the time series variation or the cross-sectional variation in the earnings-return relation. We propose to study both the temporal and cross-sectional variation in the relation between earnings, earnings changes and returns using an extension of the regime switching methodology introduced by Hamilton (1989): the heterogeneous regime switching methodology. The heterogeneous regime switching method can be summarized as follows. First, we estimate the time series variation in the earnings-returns relation for the sample firms for the period 1997–۲۰۱۰٫ The estimation method allows us to identify breaks in the time series of earnings-returns and to characterize each regime. As a result, we are able to let the data generating process determine the regime rather than identifying the breaks ex-ante which would be subjective. Second, each firm is assigned to a group (or cluster) based on how long it stays in one regime and the likelihood of switching to the other regime. Thus, the model is dynamic as it allows firms to switch between regimes across time. We identify two regimes. The low volatility regime corresponds to periods of low return volatility and a moderate association between earnings and returns. Both earnings and earnings changes are positively associated with returns but the magnitude of the earnings coefficients is smaller than in the other regime. The high volatility regime represents periods of high volatility in returns with earnings and earnings changes strongly associated with returns. This result is consistent with the idea that in periods of high price instability, such as financial crises, information about earnings is more important to investors than in ‘‘normal’’ periods. During bear market conditions, investors become more risk averse and fly from stocks with high levels of uncertainty about fundamental value (Lang and Maffett 2011). As financial information lessens uncertainty about the firm’s fundamental value and reduces risk perception, earnings become more important for investors (Lang and Maffett 2011). In other words, investors rely more on earnings information during market downturns because other information is more likely to reflect speculation and noise.