Earnings decomposition and the persistence of earnings

Abstract

This paper investigates the existence of systematic differences in persistence across components of earnings. If components of earnings experience differences in persistence, this may provide insights into the determinants of aggregate earnings level and persistence. This paper provides evidence of differences in persistence across earnings components, including earnings decomposed on the basis of cash / accruals, operating / financing / other and financial ratios components consistent with the literature. Furthermore, there is limited evidence of earnings components improving the explanatory power of models evaluating aggregate earnings persistence. Due to the pivotal role of earnings in firm valuation, the results from this paper have direct implications for valuation literature.