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The market’s reaction to changes in relative performance rankings

Author

Listed:
  • Jared Jennings

    (Washington University in St. Louis)

  • Hojun Seo

    (National University of Singapore)

  • Mark T. Soliman

    (University of Southern California)

Abstract

The media commonly gauges a firm’s performance by comparing its performance to others within the same industry. We provide evidence that investors and analysts positively value improvements to the firm’s relative performance ranking (RPR) within its industry. Consistently, RPR is positively associated with the firm’s earnings persistence, which suggests that RPR provides information about the firm’s ability to capture profits within the industry. We also find that managers use non-GAAP exclusions from earnings to improve the appearance of the firm’s RPR and that not all the information found in the firm’s performance ranking is priced by investors at the time of the earnings announcement. This evidence suggests that investors and analysts use the entire distribution of earnings to evaluate a firm’s performance, allowing us to identify an alternative benchmark not previously explored.

Suggested Citation

  • Jared Jennings & Hojun Seo & Mark T. Soliman, 2020. "The market’s reaction to changes in relative performance rankings," Review of Accounting Studies, Springer, vol. 25(2), pages 672-725, June.
    • Handle: RePEc:spr:reaccs:v:25:y:2020:i:2:d:10.1007_s11142-020-09532-1
    DOI: 10.1007/s11142-020-09532-1
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    Cited by:

    1. Wu, Sang & Xue, Wenjie, 2023. "Accounting comparability and relative performance evaluation by capital markets," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    2. Paul A. Griffin & David H. Lont, 2021. "Evidence of an increasing trend in earnings surprises over the past two decades: The role of positive manager‐initiated non‐GAAP adjustments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1525-1559, October.
    3. Seo, Hojun, 2021. "Peer effects in corporate disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 71(1).

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