Time-Series Properties and Pricing of the Special Items Component of Earnings
39 Pages Posted: 18 May 1999
Date Written: May 3, 1999
We demonstrate that the effect of special items on the time-series of seasonally-differenced quarterly earnings differs from the effect of other components of earnings. Focusing on earnings four quarters subsequent to the special item where the time-series differences are most pronounced, we also demonstrate that market expectations of earnings impounded in prices reflect these time-series differences. Further, our estimates suggest that the proportion of the time-series implications of special items impounded in prices is larger than the proportion for other, non-special items, components of earnings. Nonetheless, market prices do not fully reflect time-series implications of special items ? a significant proportion of the time-series implications of negative special items is not impounded in prices and past values of special items predict subsequent abnormal returns.
JEL Classification: M41, G14, C22
Suggested Citation: Suggested Citation