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
Date Written: January 20, 2020
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: Suggested Citation