Market Rewards Associated with Increasing Earnings Patterns

Posted: 23 Jul 1998

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

John A. Elliott

University of Connecticut - Department of Accounting

Mark W. Finn

Northwestern University - Department of Accounting Information & Management

Date Written: June 1995

Abstract

This paper examines the association between patterns of increasing earnings and incremental firm value as reflected by earnings multiples, holding level of income constant. As predicted, we find firms exhibiting patterns of increasing earnings have larger earnings multiples than other firms and the incremental earnings multiple is reduced significantly when an increasing earnings pattern is broken. The findings are robust to controlling for growth, risk, earnings variability, measurement error in permanent earnings, persistence, dividend yield, and industry membership, using proxies identified in previous research. An extension of the Lang [1991] model indicates increasing earnings patterns can affect firm valuation by permitting market participants to update their prior beliefs about the firm. We conclude earnings patterns are a proxy for value-relevant firm characteristics such as growth that are not reflected fully in proxies identified in prior research.

JEL Classification: G12

Suggested Citation

Barth, Mary E. and Elliott, John A. and Finn, Mark J., Market Rewards Associated with Increasing Earnings Patterns (June 1995). Available at SSRN: https://ssrn.com/abstract=2527

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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650-723-9040 (Phone)
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John A. Elliott

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-5524 (Phone)

Mark J. Finn

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1635 (Phone)
847-467-1202 (Fax)

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