Market reactions to unexpected relative earnings performance*
Journal
Asia-Pacific Journal of Accounting and Economics
Journal Volume
24
Journal Issue
3-4
Pages
339-357
Date Issued
2017
Author(s)
Abstract
This paper documents that investors value unexpected changes in a firm’s relative earnings performance (REP) in addition to its absolute earnings surprise on the firm’s earnings announcement date. Consistent with REP filtering out industry-wide common shocks and conveying information about the firm’s competitive advantage over its industry peers, investors react more strongly to unexpected relative earnings for firms with a stronger peer-firm earnings correlation and for firms with fewer growth options in their operations relative to their industry peers. Moreover, current unexpected REP is positively associated future growths in sales, market share, and earnings performance, suggesting that firms with stronger REP are better able to capture future industry opportunities.
Type
journal article