Executives like their earnings smooth—even in normal times, they will go to great lengths to achieve steady growth in earnings per share quarter after quarter. As the economy emerges slowly from recession, we encounter even more deference to the conventional wisdom that investors prefer smooth earnings growth and shun earnings volatility. Those who make such claims have long cited stable earnings growth as a rationale for strategic actions. In 2002, for example, the CEO of Conoco justified that company’s then pending merger with Phillips Petroleum in part by asserting that the deal would provide greater earnings stability throughout the commodity price cycle.

Our research shows that these efforts aren’t worthwhile and may actually hurt companies pursuing them. If investors really preferred smooth earnings, you would expect companies that achieve them to generate higher total returns to shareholders (TRS) and to have higher valuation multiples, everything else being equal. Yet using different techniques, company samples, and time frames, all the studies we examined¹ reached the same conclusion: there is no meaningful relationship between earnings variability and TRS or valuation multiples.