Abstract

http://ssrn.com/abstract=2035495
 


 



Evaluating Firms’ Benchmark Performance Over Time: The Counting Heuristic


Lisa Koonce


University of Texas

Marlys Gascho Lipe


University of South Carolina - Department of Accounting

January 3, 2013


Abstract:     
Market participants frequently evaluate a firm’s ability to meet or beat their earnings expectations over time. Although research reports that firms that consistently beat their earnings expectations are rewarded with a market valuation premium, most firms are inconsistent in their benchmark performance. We use multiple experiments to test the idea that investors, evaluating firms with inconsistent benchmark performance, use a counting heuristic to discriminate among firms. Our results provide strong support for the hypothesis that investors distinguish among firms by counting the number of misses and beats they experience over some time period. This simple counting heuristic is used even though investors also have available (and use) information about the magnitude of the firms’ earnings. We also find that investors draw conclusions about a firm’s future prospects and management credibility from the frequency of its benchmark beats and misses. Our study has implications for researchers and firm managers.

Number of Pages in PDF File: 37

Keywords: Benchmark performance, earnings magnitude, counting heuristic

JEL Classification: M40

working papers series


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Date posted: April 6, 2012 ; Last revised: January 3, 2013

Suggested Citation

Koonce, Lisa and Lipe, Marlys Gascho, Evaluating Firms’ Benchmark Performance Over Time: The Counting Heuristic (January 3, 2013). Available at SSRN: http://ssrn.com/abstract=2035495 or http://dx.doi.org/10.2139/ssrn.2035495

Contact Information

Lisa L. Koonce (Contact Author)
University of Texas ( email )
Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)
Marlys G. Lipe
University of South Carolina - Department of Accounting ( email )
The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
803 576-5552 (Phone)
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