An August 9th, 2021 Wall Street Journal article by Karen Langley stated, “Shares of Colgate-Palmolive Co. fell 4.8% after the consumer-products company said it expects costs to chip away at its margins in the second half of the year.” A graph of the market’s reaction is available here and links to the filings are here and here.

Despite the most recent seasonal quarterly earnings per share increasing by 12% (from $0.74 to $0.83), and Net Sales increasing by 9.5%, the company also provided the following forward guidance: “On a GAAP basis, the Company now expects a decline in gross profit margin, increased advertising investment and earnings-per-share growth at the lower end of its low to mid-single-digit rate.”

Prices then promptly dropped the 4.8% noted above. If the market was expecting much larger increases then this earnings announcement could still be seen as disappointing. But it could also be the case that the reported results were in line with expectations but what was deemed more important was the information about the future rather than how the last quarter shook out.

What does the academic literature say about how much the market actually cares about accounting performance measures that are always (mostly) backward looking and historical in nature? I think that depends on which pieces of the published evidence you look at, and that’s what I’m going to discuss today.

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