The predictive ability and information content of aggregate earnings beyond disaggregate earnings

Subject Areas : Futurology

R.  Shabahang ¹ (ندارد)
Z.  Lashgari ² (ندارد)

Received: 2015-01-13 Accepted : 2015-01-13 Published : 2006-09-23

Keywords: Operating income, Operating income ratio-panel d, exponential smoothing, market value&#x0D, &#x0D, of equity, Stock Returns, predictive ability, explanatory power, aggregate earnings, annual&#x0D, &#x0D, stock returns,

Abstract :

The predictive ability and explanatory power of an aggregate model of reported earnings is compared to adisaggregated model of reported earnings by examining their associations with contemporaneous stockreturns and future earnings. The change in annual reported earnings is disaggregated into changes in revenue,operating margin, and other expenses in order to examine whether they individually and jointly conveyinformation about future earnings that is not reflected in aggregate earnings and whether this incrementalpredictive ability is reflected in security prices.This study contributes to the information content literature in two ways. First, it examines the informationand valuation link between the operating income components of reported earnings and future earnings andstock returns. Second, the empirical analysis is conducted on an industry basis and over a eight-year periodto examine how the predictive ability and information content of earnings and its components vary acrossindustries and over time.The results indicate the following. First, changes in revenue, operating margin, and other expenses (thedisaggregated model) jointly have not predictive ability and information content beyond the change inaggregate reported earnings with respect to one-year ahead annual earnings and contemporaneous annualstock returns. Second, the predictive ability and, information content of these earnings components as well asaggregate earnings varies across industries and varies over time