The Relationship between Earnings Persistence and Stock Market Reaction (Evidence from firms listed in Tehran Stock Exchange)

Earning is one of the key factors firm managers incorporate into their decision-making. Earnings persistence and its components i.e. cash flows and accruals can significantly impact earnings quality and guide managers in their decision-making process. The purpose of the present research is to study earnings persistence, and persistence of cash flows and accruals and their impact on performance of market participants. To this end, the data from 100 production firms listed in Tehran Stock Exchange over the period 2003-2011 is examined and analyzed using F-test and multiple regression analysis. In this article, along with explanation of earnings quality, earnings persistence, and its cash and accrual components, their relationship with stock market reaction is also examined. The results indicate that earnings and its components have high persistence and stability; yet, they have no significant relationship with stock market reaction (abnormal return on stocks).