Going Concern Status, Earnings Persistence, and Informativeness of Earnings

Posted: 3 Jul 1998

See all articles by K.R. Subramanyam

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

John J. Wild

University of Wisconsin - Madison - Department of Accounting and Information Systems

Abstract

Valuation theory recognizes that the relation between earnings innovations and changes in security valuation is increasing in the persistence of the earnings innovations. Analyses in this article reveal that the present value of revisions in expected future benefits is a function of the length of revision horizon, suggesting that earnings persistence is determined in part by an entity's going concern status. These analyses predict an inverse relation between earnings informativeness and an entity's probability of termination. Drawing on a sample of quarterly earnings and returns data from more than 1,500 distinct firms for the period 1981-1990, a statistically significant inverse relation is documented between an entity's probability of termination and the informativeness of earnings -- the latter measured as the coefficient from a regression of returns on earnings. Further empirical analyses reveal that this result is a pervasive economic phenomenon not attributable to extreme conditions or other prevailing explanations of earnings informativeness. This inference is robust to variations in research design, including measurement of earnings informativeness and termination probability and alternative specifications of the relation between returns and earnings. Consequently, the evidence in this article is consistent with a fundamental role for an entity's going concern status in determining the usefulness of earnings.

JEL Classification: M41, G12

Suggested Citation

Subramanyam, K.R. and Wild, John J., Going Concern Status, Earnings Persistence, and Informativeness of Earnings. CONTEMPORARY ACCOUNTING RESEARCH, Vol 13, No 1, Spring 1996. Available at SSRN: https://ssrn.com/abstract=2581

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

John J. Wild (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

Wisconsin School of Business
975 University Avenue / Grainger Hall
Madison, WI 53706
United States
608-262-8122 (Phone)

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