A String of Earnings Increases, Future Earnings Uncertainty, and Firm Fundamentals

• In Event: Financial Accounting and Reporting

Abstract

Prior literature on meeting or beating earnings benchmarks extensively documents that market rewards firms reporting a string of consecutively earnings increases. To date, it is still unclear what an earnings string really means. This paper empirically provides rational explanations for this phenomenon by investigating whether the incremental pricing effects are determined by future earnings uncertainty and firm fundamentals that are founded on economic grounds. I find that risk in future earnings and firm fundamentals have association with a string of earnings increases. In addition, my results strongly suggest that predictive ability of a string shifts in the direction of risk rather than growth as a string has prolonged. This study provides insights into economic implications of a sequentially increasing earnings string for market prices.

Author

• Sarayut Rueangsuwan, University of Exeter