Firms with Inconsistently Signed Earning Surprises: Do Potential Investors Use a Counting Heuristic?
39 Pages Posted: 29 Aug 2013 Last revised: 2 Jun 2015
Date Written: May 29, 2015
Although prior research reports that firms that consistently beat their earnings expectations are rewarded with a market valuation premium, most firms are inconsistent in the signs of their benchmark performance, sometimes missing and sometime beating. In this paper, we report the results of multiple experiments to test the idea that potential investors, evaluating firms that have inconsistent benchmark performance, use a counting heuristic to discriminate among them. Our results provide strong support for the hypothesis that these investors distinguish among firms by counting the number of beats and misses they experience over an observed time interval. The judgmental effect of this beat-frequency is incremental to the effect of the magnitude of the beats and misses of the benchmark. Our study has implications for researchers and firm managers.
Keywords: Benchmark performance; earnings surprise; benchmark-beating frequency; counting heuristic
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