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

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.

The Relation Between Disaggregated Re-structuring Charges And Stock Returns: The Effects Of Financial Distress

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><em><span style="font-family: Times New Roman;">We examine the relation between restructuring charge components and stock returns for firms reporting restructuring charges in the year disaggregated component disclosure became mandatory. We find significant coefficients on disaggregated components of restructuring charges in a regression of returns on earnings, earnings changes, and restructuring charge components. We provide evidence that for firms that exhibit signs of financial distress, aggregate restructuring charges, as well as the disaggregated components of restructuring charges, are priced differently than they are for financially healthy firms. Results suggest that for financially distressed firms, investors perceive supplemental disclosure as a positive signal of the firm&rsquo;s future operating performance, and view negatively a disclosure that lacks detail and/or clarity.<span style="mso-spacerun: yes;">&nbsp; </span></span></em></span></p>

Determinants Of Reporting Nonrecurring Charges Subsequent To Business Combinations

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">This study examines nonrecurring earnings charges following business combinations and the characteristics that influence their reporting.<span style="mso-spacerun: yes;">&nbsp; </span>The study uses a sample of 216 business combinations in which the acquiring firm reported either goodwill or other asset impairments or restructuring charges with respect to a target firm.<span style="mso-spacerun: yes;">&nbsp; </span>The results show that changes in the level of CEO cash compensation and institutional ownership are factors that are positively associated with nonrecurring earnings charges in the post-acquisition period.<span style="mso-spacerun: yes;">&nbsp; </span>The findings suggest that the transparency of nonrecurring transactions subsequent to a business combination is evident with the expense treatment of acquisition-related costs.</span></p>