Market Rewards Associated with Increasing Earnings Patterns
Posted: 23 Jul 1998
Date Written: June 1995
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  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: Suggested Citation