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

56 Pages Posted: 5 Apr 2011

See all articles by William M. Cready

William M. Cready

University of Texas at Dallas - Naveen Jindal School of Management

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy

Craig A. Sisneros

Oklahoma State University

Date Written: March 23, 2011

Abstract

Burgstahler et al. (2002) evaluate special items, a component of earnings with time series properties that differ from recurring earnings, to determine whether the market correctly prices these transitory items. In addition, they investigate the implications of special items for future earnings and report evidence consistent with the notion 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 examine additional predictions suggested by the inter-period transfer hypothesis. We find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In addition, we find that the future earnings increases over the subsequent 16 quarters amount to over 130 percent of the negative special item reported in quarter t and over 40 percent of these increases are realized in operating cash flows. These earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns are more consistent with negative special items, and in particular restructuring charges, signaling real future performance improvements (i.e., performance improvement hypothesis) rather than inter-period expense transfer (i.e., inter-period transfer hypothesis).

Keywords: Negative special items, earnings management, Restructuring

JEL Classification: M40, M41

Suggested Citation

Cready, William M. and Lopez, Thomas J. and Sisneros, Craig A., Negative Special Items and Future Earnings: Expense Transfer or Real Improvements? (March 23, 2011). Available at SSRN: https://ssrn.com/abstract=1799990 or http://dx.doi.org/10.2139/ssrn.1799990

William M. Cready (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-2907 (Phone)

Craig A. Sisneros

Oklahoma State University ( email )

Spears School of Business
397 Business Building
Stillwater, OK 74078-4011
United States
4057449718 (Phone)

HOME PAGE: http://https://business.okstate.edu/directory/sisneros-craig-833239.html

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