Earnings Quality and the Pricing Effects of Earnings Patterns

53 Pages Posted: 25 Jun 2003

See all articles by Jennifer Francis

Jennifer Francis

Duke University

Ryan LaFond

Algert Global, LLC

Per Olsson

Duke University

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: April 2003

Abstract

We examine whether pricing effects associated with three earnings patterns (increasing annual earnings, quarterly earnings that consistently meet or exceed analyst forecasts, and smooth earnings) are related to each other and, separately, to the quality of the underlying earnings. We identify distinctly-priced incremental elements of increasing earnings and earnings quality. While the statistical significance of the incremental pricing effects of earnings smoothness and of patterns of earnings that meet or exceed analyst forecasts are mixed, in all cases, their economic importance is modest. Our main finding concerns the relation between the pricing effects of earnings patterns and earnings quality: holding constant the level of the pattern, the largest (smallest) pricing effects are associated with earnings patterns supported by high (low) quality earnings. Moreover, for all three earnings patterns, we document that the market either attaches no reward to, or imposes a penalty on, patterns achieved with low quality earnings.

Keywords: earnings patterns, earnings quality

JEL Classification: G12, M41, M43, G29

Suggested Citation

Francis, Jennifer and LaFond, Ryan and Olsson, Per Mikael and Schipper, Katherine, Earnings Quality and the Pricing Effects of Earnings Patterns (April 2003). Available at SSRN: https://ssrn.com/abstract=414142 or http://dx.doi.org/10.2139/ssrn.414142

Jennifer Francis (Contact Author)

Duke University ( email )

Fuqua School of Business
Durham, NC 27708
United States
919-660-7817 (Phone)
919-648-2818 (Fax)

Ryan LaFond

Algert Global, LLC ( email )

One Maritime Plaza
Suite 1525
San Francisco, CA 94111
United States

Per Mikael Olsson

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,735
Abstract Views
6,069
rank
9,284
PlumX Metrics