Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

2011 ◽  
Author(s):  
William M. Cready ◽  
Thomas J. Lopez ◽  
Craig A. Sisneros
Keyword(s):  
Future Earnings ◽  
Special Items

Special Items: A Descriptive Analysis

2011 ◽  
Vol 25 (3) ◽  
pp. 511-536 ◽  
Author(s):  
Peter M. Johnson ◽  
Thomas J. Lopez ◽  
Juan Manuel Sanchez
Keyword(s):  
Firm Value ◽  
Temporal Frequency ◽  
Descriptive Analysis ◽  
Financial Statements ◽  
Comprehensive Analysis ◽  
The Other ◽  
Future Earnings ◽  
Special Items ◽  
Increasing Function ◽  
Frequency Magnitude

SYNOPSIS We provide a comprehensive analysis of special items and the characteristics of the firms that recognize them. Our analysis reveals that the temporal frequency, magnitude, and persistence of special items has increased significantly in the last 30 years, and that such increases are primarily driven by negative special items. More recently, however, our evidence is consistent with both a decline in frequency and magnitude of negative special items. On the other hand, we find that the frequency of reporting of positive special items, which remained relatively constant through 2002, has increased in more recent years. We also find strong evidence that subsequent special item reporting is an increasing function of the frequency of “prior” special item reporting. Using a random subsample of firms reporting special items, we document that 22 percent of the amounts reported in Compustat do not reconcile with the amounts reported on the firms' actual financial statements. Our comprehensive analysis should be of interest to regulators, academics, and managers interested in the implications of special items on firm-related consequences such as future earnings and firm value. Our examination can also serve as a catalyst for researchers interested in extending this important area of inquiry.

The Persistence and Market Valuation of Recurring Nonrecurring Items

2010 ◽  
Vol 85 (5) ◽  
pp. 1577-1615 ◽  
Author(s):  
William Cready ◽  
Thomas J. Lopez ◽  
Craig A. Sisneros
Keyword(s):  
Market Value ◽  
The Other ◽  
Market Valuation ◽  
Future Earnings ◽  
Special Items ◽  
Market Values

ABSTRACT: This study focuses on the persistence and market value implications of a subset of nonrecurring charges that are atypical due to repeated occurrence. The increased recurrence of supposedly nonrecurring items perhaps reflects managerial shifting of (more permanent) ordinary expenses to a transitory category or, alternatively, may reflect an environment where these items naturally occur more frequently. Either scenario suggests that these repetitive charges have future earnings implications dramatically different from truly nonrecurring events and should therefore be valued more like a recurring component of earnings. Consistent with this notion, we find that as the frequency of reporting negative special items increases (measured by the presence of multiple prior charges), the persistence of these items significantly increases with respect to future earnings. Our evidence also suggests that the valuation multiple on such charges increases with frequency. That is, the market values “recurring nonrecurring” items more like the other components of recurring earnings.

The Persistence and Pricing of Earnings, Accruals, and Cash Flows When Firms Have Large Book-Tax Differences

2005 ◽  
Vol 80 (1) ◽  
pp. 137-166 ◽  
Author(s):  
Michelle Hanlon
Keyword(s):  
Cash Flows ◽  
Earnings Persistence ◽  
Taxable Income ◽  
Future Earnings ◽  
Special Items ◽  
Potential Sources ◽  
Red Flag

I investigate the role of book-tax differences in indicating the persistence of earnings, accruals, and cash flows for one-period-ahead earnings. I also examine whether the level of book-tax differences influences investors' assessments of future earnings persistence. I find that firm-years with large book-tax differences have earnings that are less persistent than firm-years with small book-tax differences. Further, the evidence is consistent with investors interpreting large positive book-tax differences (book income greater than taxable income) as a “red flag” and reducing their expectation of future earnings persistence for these firm-years. I then investigate potential sources of the lower persistence for firm-years with large book-tax differences. I find that special items contribute in part to the results but that firm-years with large booktax differences continue to have lower persistence in earnings after controlling for the effect of the special items.

Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

2012 ◽  
Vol 87 (4) ◽  
pp. 1165-1195 ◽  
Author(s):  
William M. Cready ◽  
Thomas J. Lopez ◽  
Craig A. Sisneros
Keyword(s):  
Performance Improvement ◽  
Future Earnings ◽  
Goodwill Impairment ◽  
Special Items ◽  
Performance Improvements ◽  
Current Period ◽  
Future Performance ◽  
Improvement Effect ◽  
Restructuring Charges ◽  
Transfer Device

ABSTRACT Burgstahler et al. (2002) investigate the implications of special items for future earnings and report that firms use negative special items to accelerate the recognition of future expenses into the current period. That is, negative special items serve as an “inter-period transfer” device. We extend their analysis and find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In particular, we find that future earnings increase over the subsequent 16 quarters by more than 130 percent of the reported negative special item. The earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns suggest that negative special items also signal real future performance improvements (i.e., performance improvement hypothesis) in addition to inter-period expense transfer (i.e., inter-period transfer hypothesis). Moreover, the real improvement effect appears to be driven by restructuring charges, the most prevalent type of special item.

Do Stock Prices Fully Reflect the Implications of Special Items for Future Earnings?

2002 ◽  
Vol 40 (3) ◽  
pp. 585-612 ◽  
Author(s):  
David Burgstahler ◽  
James Jiambalvo ◽  
Terry Shevlin
Keyword(s):  
Stock Prices ◽  
Future Earnings ◽  
Special Items
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