All Losses Are Not Alike: Real versus Accounting-Driven Reported Losses

59 Pages Posted: 19 May 2021 Last revised: 16 Sep 2021

See all articles by Feng Gu

Feng Gu

State University of New York at Buffalo

Baruch Lev

New York University - Stern School of Business

Chenqi Zhu

University of California, Irvine - Paul Merage School of Business

Date Written: May 16, 2021

Abstract

We examine the value relevance of accounting-driven losses that result from the immediate expensing of firms’ internally-generated intangible investments vs. losses occurring irrespective of intangible investments. Contrary to the long-held view that losses are irrelevant for valuation, we find that once the accounting bias of intangibles-expensing is undone, earnings of firms reporting intangibles-related losses are as informative as earnings of profitable firms. Contrary to the view that persistent losses decrease earnings relevance, our evidence shows no decrease in the relevance of earnings for firms reporting persistent intangibles-related losses. We also find that firms reporting intangibles-related losses outperform other loss firms and even profitable firms in value creation from technological innovation and human capital. Our evidence further shows that firms reporting intangibles-related losses have stronger future performance than other firms. Taken together, the results of this study demonstrate the fundamental differences between losses driven by the immediate expensing of internally-generated intangible investments and losses reflecting genuine business performance shortfalls. Standard accounting reports, however, do not properly reflect these differences and their implications.

Keywords: Earnings, Losses, Intangibles

Suggested Citation

Gu, Feng and Lev, Baruch Itamar and Zhu, Chenqi, All Losses Are Not Alike: Real versus Accounting-Driven Reported Losses (May 16, 2021). NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3847359 or http://dx.doi.org/10.2139/ssrn.3847359

Feng Gu (Contact Author)

State University of New York at Buffalo ( email )

12 Capen Hall
School of Management
Buffalo, NY 14221

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

Chenqi Zhu

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

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