Conditional Persistence of Earnings Components and Accounting Anomalies

Journal of Business, Finance & Accounting, Forthcoming

42 Pages Posted: 7 Aug 2015

See all articles by Eli Amir

Eli Amir

Tel Aviv University

Itay Kama

University of Michigan, Stephen M. Ross School of Business

Shai Levi

Tel Aviv University

Multiple version iconThere are 2 versions of this paper

Date Written: July 3, 2015

Abstract

We suggest that the failure of investors to distinguish between an earnings component’s autocorrelation coefficient (unconditional persistence) and the marginal contribution of that component’s persistence to the persistence of earnings (conditional persistence) provides a partial explanation to the post-earnings-announcement drift, the post-revenue-announcement drift, and the accrual anomaly. When the conditional persistence of revenue surprises is high (low) relative to its unconditional persistence, both the post-earnings-announcement drift and the post-revenue-announcement drift are high (low), because investors’ under-reaction to revenues and earnings is stronger when the persistence of revenue surprises is more strongly associated with the persistence of earnings surprises. Also, the mispricing of accruals decreases substantially when the conditional persistence of accruals is high relative to its unconditional persistence, because investors’ over-reaction to accruals is mitigated when the persistence of accruals is indeed more strongly associated with the persistence of earnings. Our findings also suggest that financial analysts’ failure to distinguish between unconditional and conditional persistence of revenues and accruals results in more biased revenue and earnings predictions.

Keywords: earnings components, persistence, post-earnings-announcement drift, accrual anomaly, forecast errors

JEL Classification: G12, G14, M40, M41

Suggested Citation

Amir, Eli and Kama, Itay and Levi, Shai, Conditional Persistence of Earnings Components and Accounting Anomalies (July 3, 2015). Journal of Business, Finance & Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2640620

Eli Amir

Tel Aviv University ( email )

312 Recanati Bldg.
69978 Tel Aviv
Israel
+972 3 640-8510 (Phone)
+972 3 640-7738 (Fax)

Itay Kama (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4538 (Phone)

Shai Levi

Tel Aviv University ( email )

Tel Aviv, 69978
Israel

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