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, and that this relation resists after controlling for growth and risk using proxies identified in previous research. However, price-earnings multiples decline significantly when earnings decrease after a previous pattern of increasing earnings. The inquiry is motivated by the observation that many managers seem focused on maintaining steadily increasing earnings. However, the regression equations forming the basis for the analyses derive from 2 valuation models, which derive for expected future dividends; consistent findings from analyses based on both models are obtained.