Consistency of Earnings Performance Trends and the Credibility of Management Forecasts

Abstract

This study examines the relationship between the firm’s actual earnings increases trend (ERN), the benchmark of consistently meeting and beating analysts’ expectations (MBE) in the prior period and the credibility of management earnings forecasts. The results show that when firms have either a consecutive earnings increases trend or an MBE trend, the market positively reacts to the good news forecasts. When firms show both earnings performance trends, the market reacts to the forecasts in an additive way. The study also finds that the market negatively reacts to the bad news forecasts regardless of the earnings performance trends.