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

  • Koonce L
  • LIPE M
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Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. ABSTRACT Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts' forecasts (i.e., benchmark per-formance) . We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple time peri-ods. Our results show that investors rely on an earnings measure only when it is consistent over time. When both measures are consistent over time, in-vestors use them in an additive fashion, suggesting that they view them as providing different information about the firm. Further tests show that in-vestors believe that earnings trend and benchmark performance both provide information about a firm's future prospects and management's credibility. Al-though judged future prospects fully explain the effect of earnings trend on investor judgments, neither judged future prospects nor management cred-ibility completely explains the effect of benchmark performance. Our study has implications for firm managers and researchers.

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Authors

  • Lisa Koonce

  • Marlys Gascho LIPE

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