Core Earnings: New Data and Evidence

57 Pages Posted: 11 Oct 2019 Last revised: 6 Nov 2019

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: November 4, 2019

Abstract

Using a novel dataset that comprehensively classifies the quantitative financial disclosures in firms' 10-Ks, including those hidden in the footnotes and the MD&A, we show that disclosures of non-operating and less persistent income-statement items are both frequent and economically significant, and increasingly so over time. Adjusting GAAP earnings to exclude these items creates a measure of core earnings that is highly persistent and that forecasts future performance. Street earnings for firms that meet or just beat analyst expectations are more likely to selectively exclude these items. Analysts and market participants also are slow to impound the implications of these items. Trading strategies that exploit cross-sectional differences in firms' transitory earnings produce abnormal returns of 7-to-10% 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 (November 4, 2019). 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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