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Firms with Inconsistently Signed Earning Surprises: Do Potential Investors Use a Counting Heuristic?

39 Pages Posted: 29 Aug 2013 Last revised: 2 Jun 2015

Lisa Koonce

University of Texas

Marlys Gascho Lipe

University of South Carolina - Department of Accounting

Date Written: May 29, 2015

Abstract

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

Suggested Citation

Koonce, Lisa and Lipe, Marlys Gascho, Firms with Inconsistently Signed Earning Surprises: Do Potential Investors Use a Counting Heuristic? (May 29, 2015). Available at SSRN: https://ssrn.com/abstract=2316954 or http://dx.doi.org/10.2139/ssrn.2316954

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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