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