The Relationship between Economic Characteristics and Alternative Annual Earnings Persistence Measures

Posted: 17 Feb 1999

See all articles by Stephen P. Baginski

Stephen P. Baginski

University of Georgia - J.M. Tull School of Accounting

Kenneth S. Lorek

Northern Arizona University

G. Lee Willinger

University of Oklahoma

Bruce C. Branson

North Carolina State University - College of Management

Abstract

Accounting researchers (and potentially others) generally select rather simple, lower-order, time-series models to develop proxies for earnings persistence. However, measures of persistence produced by such models are not related to characteristics of the firm?s economic environment that are expected to influence earnings persistence. Using a sample of 162 calendar year-end New York Stock Exchange firms, we document the cross-sectional relations between a set of relatively constant, firm-specific, economic characteristics that are theoretical determinants of persistence and measures of earnings persistence derived from both lower-order and higher-order autoregressive, integrated, moving-average (ARIMA) models. When lower-order ARIMA models are used to generate measures of earnings persistence, the cross-sectional regression models measuring the association between persistence and economic determinants of persistence yield very low adjusted R-squares. In sharp contrast, when differenced, higher-order ARIMA models are used to measure earnings persistence, adjusted R-squares are in the 10-12% range. Moreover, independent variables such as capital intensity, barriers-to-entry, and product-type are all significant in the directions suggested by economic theory. Our results are consistent with Lipe and Kormendi (1994) who argue that higher-order ARIMA models do a better job of capturing the value-relevance of current period earnings than lower-order models.

JEL Classification: M41, C32

Suggested Citation

Baginski, Stephen P. and Lorek, Kenneth S. and Willinger, G. Lee and Branson, Bruce C., The Relationship between Economic Characteristics and Alternative Annual Earnings Persistence Measures. The Accounting Review, Vol 74, No 1, January 1999. Available at SSRN: https://ssrn.com/abstract=150369

Stephen P. Baginski (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Kenneth S. Lorek

Northern Arizona University ( email )

PO Box 15066
College of Business Department of Accounting
Flagstaff, AZ 86011
United States
520-523-7406 (Phone)
520-523-7331 (Fax)

G. Lee Willinger

University of Oklahoma ( email )

307 W Brooks
School of Accounting Room 200
Norman, OK 73019
United States
405-325-5780 (Phone)
405-325-7348 (Fax)

Bruce C. Branson

North Carolina State University - College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States
919-515-4435 (Phone)
919-515-4446 (Fax)

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