The Market’s Reaction to Changes in Relative Performance Rankings

Review of Accounting Studies, forthcoming

67 Pages Posted: 6 Nov 2019 Last revised: 5 Jun 2020

See all articles by Jared N. Jennings

Jared N. Jennings

Washington University in St. Louis

Hojun Seo

Purdue University - Krannert School of Management

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: January 20, 2020

Abstract

The media commonly gauges a firm’s performance by comparing its performance to others within the same industry. We provide evidence that investors and analysts positively value improvements to the firm’s relative performance ranking (RPR) within its industry. Consistently, RPR is positively associated with the firm’s earnings persistence, which suggests that RPR provides information about the firm’s ability to capture profits within the industry. We also find that managers use non-GAAP exclusions from earnings to improve the appearance of the firm’s RPR and that not all the information found in the firm’s performance ranking is priced by investors at the time of the earnings announcement. This evidence suggests that investors and analysts use the entire distribution of earnings to evaluate a firm’s performance, allowing us to identify an alternative benchmark not previously explored.

Keywords: relative performance ranking; earnings; benchmarking

JEL Classification: G30, Ll0, L19, M40, M41

Suggested Citation

Jennings, Jared N. and Seo, Hojun and Soliman, Mark T., The Market’s Reaction to Changes in Relative Performance Rankings (January 20, 2020). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3476438 or http://dx.doi.org/10.2139/ssrn.3476438

Jared N. Jennings (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Hojun Seo

Purdue University - Krannert School of Management ( email )

403 W State St
West Lafayette, IN 47907
United States

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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