The Persistence of Special Items

47 Pages Posted: 15 Sep 2006

See all articles by Patricia M. Fairfield

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business

Karen A. Kitching

George Mason University

Date Written: May 2007

Abstract

Prior research shows that negative special items are less persistent than core earnings. However, the allocation of special items to periodic earnings entails significant measurement error which may induce the observed lower persistence. In this paper, we control for this measurement error by aggregating core earnings and special items over periods of one to five years, and testing whether the differential persistence is robust to longer aggregation periods.

We find lower persistence of special items only for firms with low core (pre-special items) profitability. For these firms, negative special items have no association with future bottom line earnings for all aggregation periods. In contrast, for high core profitability firms, negative special items exhibit significant persistence, and the persistence increases with the aggregation period. In particular, when earnings are aggregated over five years, we find no difference in the persistence of negative special items and core earnings.

Keywords: special items, measurement error, persistence

JEL Classification: M41, M44, M45

Suggested Citation

Fairfield, Patricia M. and Tang, Vicki Wei and Kitching, Karen A., The Persistence of Special Items (May 2007). Available at SSRN: https://ssrn.com/abstract=930835 or http://dx.doi.org/10.2139/ssrn.930835

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-4583 (Phone)
202-687-4031 (Fax)

Vicki Wei Tang (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Karen A. Kitching

George Mason University ( email )

Fairfax, VA
United States
703-993-9038 (Phone)
703-993-1809 (Fax)

HOME PAGE: http://business.gmu.edu/facultyandresearch/faculty/profile/47/41/

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