Earnings Trends and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use

40 Pages Posted: 8 Mar 2009 Last revised: 12 Jul 2010

See all articles by Lisa Koonce

Lisa Koonce

University of Texas

Marlys Gascho Lipe

University of South Carolina - Department of Accounting

Date Written: January 6, 2010

Abstract

Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts’ forecasts (i.e., benchmark performance). We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple time periods. Our results show that investors rely on an earnings measure only when it is consistent over time. When both measures are consistent over time, investors use them in an additive fashion, suggesting that they view them as providing different information about the firm. Further tests show that investors believe that earnings trend and benchmark performance each provides information about a firm’s future prospects and management’s credibility. Although judged future prospects fully explains the effect of earnings trend on investor judgments, neither judged future prospects nor management credibility completely explain the effect of benchmark performance. Our study has implications for firm managers and researchers.

Keywords: Earnings benchmarks, earnings trends, investor reaction, consistency across time

JEL Classification: M41, G29, C91

Suggested Citation

Koonce, Lisa L. and Lipe, Marlys G., Earnings Trends and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use (January 6, 2010). Available at SSRN: https://ssrn.com/abstract=1355263 or http://dx.doi.org/10.2139/ssrn.1355263

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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