Meet-or-beat streak heterogeneity and equity prices

Abstract

Previous research finds higher stock prices for firms with extended EPS meet-or-beat streaks benchmarked to analysts’ forecasts. Due to the different persistence and reliability properties of firms’ revenues and expenses, in this study, I test whether stock valuations are different when EPS streaks are extended by firms meeting their revenue versus expense targets. I find that EPS meet-or-beat streaks that are primarily extended by firms meeting or beating analysts’ revenue forecasts are positively valued by the market but EPS streaks extended by meeting implied-expense targets are not associated with equity valuations. I also find revenue meet-or-beat streaks are likewise positively associated with equity prices but extended expense meet-or-beat streaks are negatively associated with equity valuations. These relationships are stronger for growth firms and firms that report research and development expenses. In short, my results suggest investors only value firms’ ability to consistently achieve analysts’ revenue forecasts.