Effect of Earnings Growth Strategy on Earnings Response Coefficient and Earnings Sustainability

Abstract

One of the main guidance in experimental research works of financial accounting since Ball and Brown’s work is understanding and describing different market reactions to earnings information. This research topic is called earnings response coefficient. Earnings response coefficient measures unexpected market returns in response to the unexpected component of reported earnings by the company. In the current research study, effect of earnings growth strategy on earnings response coefficient and earnings sustainability is measured for period 2006 – 2012, and overall 618 observations were used. Statistical method used in this research is average test. Research findings indicate average earnings response coefficient in the companies with earnings growth strategy is larger than average earnings response coefficient in companies with cost reduction strategy. Also, average earnings sustainability in companies with earnings growth strategy is larger than average earnings sustainability in companies with cost reduction strategy.