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The stock market boosts its rewards for increasing earnings patterns

Author

Listed:
  • Yu-An Chen

    (Seton Hall University)

  • Dan Palmon

    (Rutgers University)

Abstract

Barth et al. (J Account Res 37:387–413, 1999. https://doi.org/10.2307/2491414 ) find that the market rewards firms showing increasing earnings patterns with larger price-earnings multiples from 1982 to 1992. This paper examines whether the rewards for increasing earnings patterns have changed since then. The declining relevance of accounting earnings for equity valuation or accounting scandals in the early 2000s would predict a lower valuation for earnings numbers. On the other hand, earnings-related disclosures and post-scandal regulatory efforts, such as the Sarbanes–Oxley Act (SOX), may boost earnings relevance and restore investor confidence in the accounting system, predicting increased rewards for increasing earnings patterns. We find that the earnings multiples for firms with increasing earnings patterns decrease temporarily in the years with major accounting scandals, but the market boosts its rewards to firms showing increasing earnings patterns in the reshaped reporting environment after 1993, and SOX is associated with this boost.

Suggested Citation

  • Yu-An Chen & Dan Palmon, 2025. "The stock market boosts its rewards for increasing earnings patterns," Review of Quantitative Finance and Accounting, Springer, vol. 64(2), pages 663-711, February.
    • Handle: RePEc:kap:rqfnac:v:64:y:2025:i:2:d:10.1007_s11156-024-01316-x
    DOI: 10.1007/s11156-024-01316-x
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    More about this item

    Keywords

    Earnings; Capital market; Accounting scandals; Sarbanes–Oxley Act;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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