Disaggregating Operating and Financing Activities: Implications for Forecasts of Profitability

48 Pages Posted: 28 Jan 2010 Last revised: 13 May 2014

See all articles by Adam M. Esplin

Adam M. Esplin

University of Texas at El Paso

Max Hewitt

University of Arizona - Eller College of Management

Marlene Plumlee

University of Utah - School of Accounting

Teri Lombardi Yohn

Indiana University - Kelley School of Business - Department of Accounting

Date Written: October 20, 2012

Abstract

Researchers, practitioners, and standard setters emphasize the importance of disaggregating financial statements into operating and financial activities. However, there is a lack of research demonstrating that this disaggregation improves forecasts of profitability. In this study, we consider whether and when the operating/financial disaggregation improves forecasts of profitability. Contrary to the use of an ‘aggregate’ forecasting approach by most related prior research, we first show that the operating/financial disaggregation only provides forecast improvement over a benchmark model incorporating aggregate information when the ‘components’ forecasting approach is used. We also compare the operating/financial disaggregation to the unusual/infrequent disaggregation currently required by U.S. GAAP. We find that the operating/financial disaggregation yields less accurate forecasts than the unusual/infrequent disaggregation. However, when using the ‘components’ forecasting approach, we find that the co bination of both disaggregations improves forecasts of profitability. Finally, we document that the incremental usefulness of the operating/financial disaggregation relative to a benchmark model incorporating aggregate information is a function of growth and accounting conservatism. Overall, our study provides timely evidence concerning how analysts and investors might best use the operating/financial disaggregation for forecasting profitability.

Keywords: disaggregation, operating, financing, unusual or infrequent

JEL Classification: M41

Suggested Citation

Esplin, Adam M. and Hewitt, Max and Plumlee, Marlene A. and Yohn, Teri Lombardi, Disaggregating Operating and Financing Activities: Implications for Forecasts of Profitability (October 20, 2012). University of Alberta School of Business Research Paper No. 2014-09; 2014, Review of Accounting Studies, 19 (1): 328-362 . Available at SSRN: https://ssrn.com/abstract=1543459 or http://dx.doi.org/10.2139/ssrn.1543459

Adam M. Esplin

University of Texas at El Paso ( email )

500 W University Ave
El Paso, TX 79902
United States

Max Hewitt

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E. Helen Street
Tucson, AZ 85721
United States
(520) 621-4805 (Phone)

Marlene A. Plumlee (Contact Author)

University of Utah - School of Accounting ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Teri Lombardi Yohn

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
(812) 855-0430 (Phone)

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