Confirming or Conflicting Sales and Earnings Signals

The purpose of this study is to document differential market returns to conflicting sales and profit signals in preliminary earnings announcements. Typically, a preliminary earnings announcement includes information about both revenue and profit for the quarter. The 2 signals may exhibit the same tr...

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Bibliographic Details
Published in:Journal of portfolio management 2002, Vol.28 (4), p.45-56
Main Authors: Ertimur, Yonca, Livnat, Joshua
Format: Article
Language:English
Subjects:
Abnormal returns
Corporate growth
Earnings
Growth rate
Growth stocks
Investment policy
Investments
Investors
Profits
R&D
Ratios
Research & development
Stock prices
Studies
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Summary:The purpose of this study is to document differential market returns to conflicting sales and profit signals in preliminary earnings announcements. Typically, a preliminary earnings announcement includes information about both revenue and profit for the quarter. The 2 signals may exhibit the same trend, or they may conflict. If one indicates an increase and the other a decrease, interpretation of the joint signal is more complicated. The evidence is that, for growth companies, market reactions are generally positive and statistically different from zero only when both earnings and revenues increase. If either revenues or earnings show a slow (or negative) growth, market reactions to the preliminary announcements are generally unfavorable, or at best indistinguishable from zero. The results of this study are relevant for investors and portfolio managers in portfolio selection and monitoring decisions. Investors in value companies should attempt to identify firms that control costs, even when growth is low or negative. Value investors can earn positive returns not only from high revenue and profit growth, but also from expenses that decline faster than declining revenues.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.2002.319853