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      Core Earnings? New Data and Evidence
      16 Oct 2019Working Paper Summaries

      Core Earnings? New Data and Evidence

      by Ethan Rouen, Eric So, and Charles C.Y. Wang
      Using a novel dataset of earnings-related disclosures embedded in the 10-Ks, this paper shows how detailed financial statement analysis can produce a measure of core earnings that is more persistent than traditional earnings measures and forecasts future performance. Analysts and market participants are slow to appreciate the importance of transitory earnings.
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      Author 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. Analysts and market participants are slow to impound the implications of transitory earnings. Trading strategies that exploit cross-sectional differences in firms' transitory earnings produce abnormal returns of 7-to-10 percent per year.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: October 2019
      • HBS Working Paper Number: HBS Working Paper No. 20-047
      • Faculty Unit(s): Accounting and Management
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      Ethan C. Rouen
      Ethan C. Rouen
      Assistant Professor of Business Administration
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      Charles C.Y. Wang
      Charles C.Y. Wang
      Glenn and Mary Jane Creamer Associate Professor of Business Administration
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