Time‐Varying Earnings Persistence and the Delayed Stock Return Reaction to Earnings Announcements<sup>*</sup>

Chen, Changling

doi:10.1111/j.1911-3846.2012.01165.x

Cited by 21 publications

(46 citation statements)

References 68 publications

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“…Following prior studies (e.g., Chen, ; Mendenhall, ), I defined earnings persistence as the first‐order autocorrelation coefficient of seasonally differenced quarterly earnings ( SDE ). Chen () derived a firm‐specific time‐varying earnings persistence measure using the following model:

S D E_{i, q - 1} = a_{0} + true {true\sum}_{j = 1}^{J} b_{j} F_{j, i, q - 2} + ((), c_{0} + true {true\sum}_{j = 1}^{J} c_{j} F_{j, i, q - 2}) * S D E_{i, q - 2} + ε_{i, q - 1},

where SDE iq − 1 is firm i 's seasonally differenced quarterly earnings defined as the seasonal change (between quarter q‐1 and q‐5 ) in quarterly earnings before extraordinary items (# IBQ ) divided by the quarter‐end total assets (# ATQ ); F j , i , q − 2 is firm i 's j th persistence determinant in quarter q‐2 (definitions of these variables are presented in the ). Earnings persistence for quarter q is calculated as

{\hat{ρ}}_{i, q} = {\hat{c}}_{0}^{q - 1} + true {true\sum}_{j = 1}^{J} {\hat{c}}_{j}^{q - 1} F_{i, j, q}

.…”

Section: Resultsmentioning

confidence: 99%

“…Earnings persistence for quarter q is calculated as

{\hat{ρ}}_{i, q} = {\hat{c}}_{0}^{q - 1} + true {true\sum}_{j = 1}^{J} {\hat{c}}_{j}^{q - 1} F_{i, j, q}

. Chen's () methodology is particularly pertinent to this study because a similar firm‐specific time‐varying measure is also needed to assess changes in earnings persistence over the course of earnings strings.…”

Section: Resultsmentioning

confidence: 99%

“…Each earnings string has at least twenty quarters in which the split‐adjusted basic earnings per share are not decreasing in comparable quarters. Using a modified Chen's () partial adjustment model, I find that the estimated earnings persistence declines before the break; in fact, it shows a concave trend—first increasing and then decreasing—during earnings strings.…”

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confidence: 92%

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Earnings persistence, fundamentals, and anticipation of breaking earnings strings

Yao¹

2015

Can J Adm Sci

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Using a sample of firms with consecutive earnings growth for more than 20 quarters (earnings strings), I assess the relationship between earnings persistence and the extent to which investors are able to anticipate breaks of earnings strings. I find that firm‐specific earnings persistence exhibits a concave trend during earnings strings. Stock returns are significantly and positively associated with earnings persistence. Upon breaks of earnings strings, investors’ reactions are more negative for firms with higher earnings persistence—especially those with smaller institutional holdings and analyst coverage, and those with insider selling activities—before the break. Additional analyses show that variations in firms’ economic performance (fundamentals) explain the varying earnings persistence during earnings strings. Copyright © 2015 ASAC. Published by John Wiley & Sons, Ltd.

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S D E_{i, q - 1} = a_{0} + true {true\sum}_{j = 1}^{J} b_{j} F_{j, i, q - 2} + ((), c_{0} + true {true\sum}_{j = 1}^{J} c_{j} F_{j, i, q - 2}) * S D E_{i, q - 2} + ε_{i, q - 1},

{\hat{ρ}}_{i, q} = {\hat{c}}_{0}^{q - 1} + true {true\sum}_{j = 1}^{J} {\hat{c}}_{j}^{q - 1} F_{i, j, q}

.…”

Section: Resultsmentioning

confidence: 99%

“…Earnings persistence for quarter q is calculated as

{\hat{ρ}}_{i, q} = {\hat{c}}_{0}^{q - 1} + true {true\sum}_{j = 1}^{J} {\hat{c}}_{j}^{q - 1} F_{i, j, q}

Section: Resultsmentioning

confidence: 99%

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confidence: 92%

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Earnings persistence, fundamentals, and anticipation of breaking earnings strings

Yao¹

2015

Can J Adm Sci

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“…PER is standardized rank of earnings persistence based on AR (1) The results documented in Table 4 do not confirm the expectation of a negative effect of earnings persistence on short-term components and/or a positive effect on long-term components. One possible explanation presented by the literature is that market agents fail to fully recognize the implication of earnings persistence for future earnings (Bernard & Thomas, 1990;Chen, 2013).…”

Section: Firm Value Decomposition: Level Price Regressionsmentioning

confidence: 99%

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

Pimentel

Aguiar

2016

Rev. adm. empres.

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Based on the assumption that earnings persistence has implications for both financial analysis and compensation contracts, the aim of this paper is to investigate the role of earnings persistence assuming that (i) more persistent earnings are likely to be a better input to valuation models and (ii) more persistent earnings are likely to serve as a proxy for long-term market and managerial orientation. The analysis is based on Brazilian listed firms from 1995 to 2013, and while we document strong support for the relevance of earnings persistence in financial analysis and valuation, we fail to document a significant relationship between earnings persistence and long-term value orientation. These results are sensitive to different specifications, and additional results suggest that firms' idiosyncratic risk (total risk) is relevant to explain the focus on short-term outcomes (short-termism) across firms. The main contribution of this paper is to offer empirical evidence for the relevance of accounting numbers in both valuation and contractual theories in an emergent market.

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“…However, Soffer and Lys () find that, upon earnings announcements, investors are unaware of this serial correlation; instead, information disseminated after earnings announcement leads investors to revise their earnings expectations to levels that reflect the serial correlation of earnings surprises. Chen () finds that the magnitude of PEAD is positively related to time‐varying earnings persistence, suggesting that investors do not fully recognize the differences in the time‐varying serial correlation of earnings surprises across firms.…”

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confidence: 99%

International Diversification, SFAS 131 and Post‐Earnings‐Announcement Drift

Kang

Khurana

Wang

2017

Contemporary Accting Res

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Using data from 1990-2013, we show 1) the serial correlation of analyst forecast errors increases in the extent of international diversification, 2) PEAD based on analyst forecast errors increases in the extent of international diversification, and 3) the impact of international diversification on the serial correlation of analyst forecast errors and the associated drift is significantly reduced after the implementation of SFAS 131. When we replicate our tests using seasonally differenced earnings, we fail to observe patterns similar to those using analyst forecast errors. Overall, our findings point to the usefulness of accounting information to assist capital markets in pricing earnings of internationally diversified firms.

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Time‐Varying Earnings Persistence and the Delayed Stock Return Reaction to Earnings Announcements^*

Cited by 21 publications

References 68 publications

Earnings persistence, fundamentals, and anticipation of breaking earnings strings

Earnings persistence, fundamentals, and anticipation of breaking earnings strings

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

International Diversification, SFAS 131 and Post‐Earnings‐Announcement Drift

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Time‐Varying Earnings Persistence and the Delayed Stock Return Reaction to Earnings Announcements*

Cited by 21 publications

References 68 publications

Earnings persistence, fundamentals, and anticipation of breaking earnings strings

Earnings persistence, fundamentals, and anticipation of breaking earnings strings

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

International Diversification, SFAS 131 and Post‐Earnings‐Announcement Drift

Contact Info

Product

Resources

About

Time‐Varying Earnings Persistence and the Delayed Stock Return Reaction to Earnings Announcements^*