Evaluating Firms’ Benchmark Performance Over Time: The Counting Heuristic
University of Texas
Marlys Gascho Lipe
University of South Carolina - Department of Accounting
January 3, 2013
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: M40working papers series
Date posted: April 6, 2012 ; Last revised: January 3, 2013
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