Barth et al. (1999) document that firms sustaining a
string of increasing earnings have higher price-earnings
ratios and Myers et al. (2007)find such firms receive higher abnormal stock
market returns during the string periods compared to firms not exhibiting this
earnings pattern. The primary objective of the current study is to improve our
understanding of how firms can maintain a consecutive string of increasing
earnings. Most firms that have a string on increasing
earnings do so by increasing revenues (Ghosh et al., 2005). Firms that
maintain a string of earnings during periods of decreasing revenues must effectively manage costs to decrease their expenses
sufficiently to increase earnings during those periods. Prior literature
does not provide insights into the characteristics of firms and their market
environments that allow them to maintain a string of consecutive earnings over
periods that include both increasing and decreasing revenues. This paper
contributes to filling that gap in the literature using large data and shows
that cost flexibility is an important factor associated with a firm that can
maintain a string of increasing earnings and finds that demand uncertainty for
a firm’s products is inversely related to a
firm’s ability to maintain a string of increasing earnings. In addition, an
examination of the asymmetric cost behavior of the firms that experience at
least one sales decrease during a
consecutive string of increasing earnings indicates that these firms are
associated with anti-sticky cost behavior during the string periods and exhibit sticky costs when the
string ends.
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