Changes In Special Items And Future Firm Growth

This study examines the effect of changes in special items on future firm growth. We find that a decrease in special items reverses almost completely through one-year-ahead earnings, whereas an increase in special items is positively associated with the next year’s earnings growth. We also find that the information embedded in changes in special items is incremental to that of fundamental signals documented in the literature, thereby identifying changes in special items as an additional fundamental signal. Furthermore, we find that both an increase and a decrease in special items lead to decreases in future sales and net operating assets, suggesting an inverse U-shaped relation between changes in special items and growth in these measures. Overall, our findings underscore the importance of considering various growth measures in understanding the implication of changes in special items for future firm growth.

Changes In Special Items And Future Firm Growth

This study examines the effect of changes in special items on future firm growth. We find that a decrease in special items reverses almost completely through one-year-ahead earnings, whereas an increase in special items is positively associated with the next year’s earnings growth. We also find that the information embedded in changes in special items is incremental to that of fundamental signals documented in the literature, thereby identifying changes in special items as an additional fundamental signal. Furthermore, we find that both an increase and a decrease in special items lead to decreases in future sales and net operating assets, suggesting an inverse U-shaped relation between changes in special items and growth in these measures. Overall, our findings underscore the importance of considering various growth measures in understanding the implication of changes in special items for future firm growth.

Forecasting operating profitability with DuPont analysis

Purpose – The purpose of this study is to re-examine the relation between changes in profit margin (ΔPM) and changes in return on net operating assets (ΔRNOA) by partitioning on the direction of the change in PM. DuPont analysis provides a means of disaggregating a firm’s return on net operating assets (RNOA) into asset turnover (ATO) and profit margin (PM) components to gain insights into the underlying drivers of operating profitability. Prior research finds that changes in ATO are informative about one-year-ahead changes in RNOA, while changes in PM are not. Design/methodology/approach – Consistent with prior research, regression analysis is used to develop a predictive model for one-year-ahead changes in RNOA. Results based on in-sample parameter estimates are used to examine the out-of-sample forecasting accuracy of alternative model specifications. Findings – The results are consistent with significant forecast improvement resulting from considering the impact on future RNOA of the direction of the ΔPM. Originality/value – The study contributes to the literature on the determinants of profitability ratios by providing further guidance on how financial statement information can be utilized to improve forecasts of firm performance.

An International Investigation Of Conservative Bias And Accounting Practices

This paper investigates the relationship between conservatism of accrual accounting and the relationship described by Ohlson (1995) and Feltham and Ohlson (1995) between future profitability and both current profitability and the growth in net operating assets. To evaluate the conservatism of accounting practices, we construct an annual index for six countries based on the relationship of depreciation and amortization expense and research and development costs expensed to the underlying long-term operating assets. As in Fairfield, Whisenant, and Yohn (2003, hereafter FWY), the growth in net operating assets is disaggregated into growth in long-term net operating assets and accruals. We focus on the accrual practices used by companies listed on the primary exchanges in six countries, to assess whether there are country-specific accounting differences that affect the profitability relationship, and whether such differences are related to the negative earnings persistence of the components of growth in net operating assets documented by FWY for the US. Following FWY, we also disaggregate growth in net operating assets into growth in net long-term operating assets and growth in net short-term operating assets to assess their relative persistence. Our findings suggest that variation in the conservative bias in accounting practices affects the impact of the growth in short-term and long-term net operating assets differently, providing evidence that the accrual anomaly is not just another representation of the growth anomaly. Finally, we employ the Mishkin (1983) model to extend internationally the FWY findings of market inefficiency with regards to the impounding in stock prices information conveyed by investments in short-term and long-term net operating assets.

AKRUAL: PROKSI EARNINGS QUALITY YANG MASIH DIPERDEBATKAN

The study tried to confirm the statement of the presence of the anomaly in the accrual component persistence as proxied the earnings quality. Previous study by Sloan (1996) found that the low persistence of the accrual component in earnings indicated low reliability of the accrual. Further study by Xie (2001), DeFond and Park (2001) found that the low persistence of the accruals was primarily related to the discretionary accrual was expected to result from the earnings management through the accrual component, especially the discretionary accrual. In fact, the test was conducted using the impact of the growth in net operating assets by Fairfield et al. (2003). He tested the basis of the study by Sloan (1996) by including the impact of the growth in net operating assets to measure the persistence level and the presence of mispricing in the earnings accrual component. The study by Fairfield et al. (2003) found that the accrual component had the persistence level similar to that of operating cash flow component. Furthermore, Guay, Kothari, and Watts (1996) tested this issued that conducted using Iwo hypothesis, performance measure hypothesis and opportunistic accrual management hypothesis. The study by Guay, Kothari, and Watts (1996) found that the accrual had a high persistence component as proxied the earnings quality.