Market Rewards Associated with Patterns of Increasing Earnings

This study demonstrates that firms with patterns of increasing earnings have higher price-earnings multiples than other firms.(1) We find that patterns of increasing earnings are positively correlated with growth and negatively correlated with risk, as measured by proxies identified in prior research. Yet, the findings indicate that the higher price-earnings multiples associated with patterns of increasing earnings obtain after controlling for growth and risk using the proxies.(2) We also find that price-earnings multiples decline significantly when earnings decrease after a previous pattern of increasing earnings.