Earnings Response Coefficient: Earnings persistence moderated by capital structure and economic growth

This study examines the influence of earnings persistence on the Earnings Response Coefficient (ERC) in companies listed on the Indonesia Stock Exchange from 2011 to 2021. Utilizing multiple linear regression, the findings reveal that persistent earnings positively affect ERC, with this impact moderated by capital structure and economic growth. Results showed that firms with more persistent earnings have a higher ERC, and that effect is more pronounced when the level of corporate debt or the level of GDP growth rate is low. The results tend to indicate that when a firm is capable of reporting a high level of earnings sustainably and catches the attention of investors, the market’s response to the firm does not tend to be negative. High risk tends to erode the confidence of investors in the level of earnings, thereby lowering the effect of earnings persistence on ERC. Further, the goodness of the GDP growth rate may also spill over to market perception regarding the capability of companies’ earnings and, hence, further reinforces the earnings-ERC relationship. These insights enhance understanding of stock market pricing processes, providing actionable recommendations for investors, corporate managers, and policymakers.