Abstract:
Forecasting future period profitability is widely
Identified as an aim of financial statement
analysis, and these forecasts are typically relied
upon for the estimation of firm value. To
facilitate this, the decomposition of earnings
into its components or drivers, is typically
advocated. This paper investigates the existence
of systematic differences in persistence across
the components of earnings. If components of
earings 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 between components of earnings.
Differences are found between components
formed on the basis of: financial ratios;
operating and financing activities; and cash and
accruals. Furthermore, there is evidence that
earnings components improve the explanatory
power of models evaluating aggregate earnings
persistence, with this result being strongest for
firms with extreme income decreasing accruals.
Due to the pivotal role of earnings in firm
valuation, the results from this paper have direct
implications for valuation.
