Sustained Earnings and Revenue Growth, Earnings
Quality, and Earnings Response Coefﬁcients
ALOKE GHOSH email@example.com
Oﬃce of Economic Analysis, The Securities and Exchange Commission, Washington, DC 20549, and Zicklin
School of Business, Baruch College, The City University of New York, New York, NY 10010
ZHAOYANG GU firstname.lastname@example.org
Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213
PREM C. JAIN* email@example.com
McDonough School of Business, Georgetown University, Washington, DC 20057
Abstract. We show that ﬁrms reporting sustained increases in both earnings and revenues have (1) higher
quality earnings and (2) larger earnings response coeﬃcients (ERCs) in comparison to ﬁrms reporting
sustained increases in earnings alone. With respect to earnings quality, ﬁrms with revenue-supported in-
creases in earnings have more persistent earnings, exhibit less susceptibility to earnings management, and
have higher future operating performance. With respect to response coeﬃcients, ﬁrms with revenue-sup-
ported increases in earnings have both higher ERCs and lower book value response coeﬃcients, consistent
with the implications of the Ohlson (1995, Contemporary Accounting Research 12, 661–687) model.
Keywords: earnings growth, revenue growth, earnings quality, earnings response coeﬃcients
JEL Classiﬁcation: G12, M41
In this paper, we explore the eﬀects of sustained increases in earnings concurrent
with sustained increases in revenues on the quality of earnings and earnings response
coeﬃcients (ERCs). Prior research demonstrates that ﬁrms with sustained increases
in earnings have higher ERCs than other ﬁrms (Barth et al., 1999).
similar patterns of earnings increases across ﬁrms need not signal similar information
because earnings increases could emanate from diﬀerent components of earnings. In
a short-window event study context, revenues and expenses, the two major com-
ponents of earnings, have been shown to be diﬀerentially informative (Ertimur et al.,
2003). However, the valuation eﬀects of sustained increases in earnings attained
through revenue increases vis-a
-vis cost reductions are not yet known. To under-
stand these eﬀects, we partition ﬁrms with sustained increases in earnings into two
groups: ﬁrms that report sustained increases in earnings along with sustained
increases in revenues, and ﬁrms that do not report sustained increases in revenues.
We hypothesize that for ﬁrms that report sustained increases in earnings along with
sustained increases in revenues, (1) earnings are of higher quality and (2) ERCs are
* Corresponding author.
Review of Accounting Studies, 10, 33–57, 2005
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