Earnings Trend and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use

Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts' forecasts (i.e., benchmark performance). We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple t...

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Bibliographic Details
Published in:Journal of accounting research 2010-09, Vol.48 (4), p.859-884
Main Authors: KOONCE, LISA, LIPE, MARLYS GASCHO
Format: Article
Language:English
Subjects:
Analytical forecasting
Benchmarking
Benchmarks
Business structures
Credibility
Earnings
Earnings forecasting
Earnings trends
Financial analysis
Financial performance
Financial reporting
Investment management companies
Investment strategies
Investment value
Investors
Modeling
Net income
Performance metrics
Studies
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Summary:Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts' forecasts (i.e., benchmark performance). We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple time periods. Our results show that investors rely on an earnings measure only when it is consistent over time. When both measures are consistent over time, investors use them in an additive fashion, suggesting that they view them as providing different information about the firm. Further tests show that investors believe that earnings trend and benchmark performance both provide information about a firm's future prospects and management's credibility. Although judged future prospects fully explain the effect of earnings trend on investor judgments, neither judged future prospects nor management credibility completely explains the effect of benchmark performance. Our study has implications for firm managers and researchers.
ISSN:0021-8456
1475-679X
DOI:10.1111/j.1475-679X.2010.00377.x