Core Earnings: New Data and Evidence

70 Pages Posted: 11 Oct 2019 Last revised: 27 Oct 2020

See all articles by Ethan Rouen

Ethan Rouen

Harvard Business School

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Charles C. Y. Wang

Harvard Business School

Date Written: October 20, 2020

Abstract

Using a novel dataset, we show that components of firms' GAAP earnings stemming from ancillary business activities or transitory shocks are significant in frequency and magnitude. These components have grown over time and are dispersed across various sections of the 10-K. Excluding them from GAAP earnings yields a core earnings measure that distinguishes between the recurring and non-recurring components of net income and forecasts future performance. Analysts and market participants are slow to impound these earnings components' implications, particularly the amounts disclosed in footnotes. Trading strategies that exploit non-core earnings produce abnormal returns of 8% per year.

Keywords: Core Earnings, Transitory Earnings, Non-Operating Earnings, Quantitative Disclosures, Equity Valuation, Big Data

JEL Classification: C14, G10, G18, M40, M41

Suggested Citation

Rouen, Ethan and So, Eric C. and Wang, Charles C. Y., Core Earnings: New Data and Evidence (October 20, 2020). Harvard Business School Accounting & Management Unit Working Paper No. 20-047, October 2019, Available at SSRN: https://ssrn.com/abstract=3467814 or http://dx.doi.org/10.2139/ssrn.3467814

Ethan Rouen

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6275 (Phone)

HOME PAGE: http://www.ethanrouen.com

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Charles C. Y. Wang (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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