Are Special Items Informative About Future Profit Margins?

51 Pages Posted: 15 Dec 2008

See all articles by Patricia M. Fairfield

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law

Karen A. Kitching

George Mason University

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business

Date Written: December 12, 2008

Abstract

Most proponents of using profit margins in a forecasting model suggest that unusual items be removed from income to create a "core" profit margin. We investigate the appropriateness of this assumption over short and long horizons. Specifically, we explore the association between profit margins and special items over windows of increasing length, from one to five years. We find the association between past special items and future profit margins differs markedly between firms with low and high core profitability. For low profitability firms, past special items have no association with future profit margins, even over windows of five years. In sharp contrast, for high profitability firms, negative special items are associated with lower future profit margins. This suggests that some firms maintain high core profitability by becoming serial chargers and special items differ from core earnings only to the extent that the allocation process induces timing errors in reported earnings.

Keywords: Special items, persistence, core earnings, earnings aggregation, profit margins

JEL Classification: M41

Suggested Citation

Fairfield, Patricia M. and Kitching, Karen A. and Tang, Vicki Wei, Are Special Items Informative About Future Profit Margins? (December 12, 2008). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1315424

Patricia M. Fairfield (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-4583 (Phone)
202-687-4031 (Fax)

Karen A. Kitching

George Mason University ( email )

Fairfax, VA
United States
703-993-9038 (Phone)
703-993-1809 (Fax)

HOME PAGE: http://business.gmu.edu/facultyandresearch/faculty/profile/47/41/

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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