The value relevance of losses revisited: the importance of earnings aggregation. (1st January 2011)

• Record Type: Journal Article
• Authors: Beisland, Leif Atle
• Is Part Of: Global business & economics review. Volume 13:Number 2(2011)
• Page Start: 126
• Page End: 146
• Publication Date: 2011-01-01
• Subjects: value relevance -- earnings -- cash flow -- accruals -- loss -- accounting -- financial reporting; Economics -- Periodicals; International economic relations -- Periodicals; 330.5
• Languages: English
• ISSNs: 1097-4954

Abstract

Prior research has suggested that earnings explain a larger portion of the variation in stock returns when disaggregated into components. This study shows that the increase in explanatory power stems primarily from disaggregation of negative earnings. When accounting earnings are sufficiently disaggregated into items, there is no longer a statistical difference in the value relevance of positive and negative earnings. Thus, negative earnings are also useful to stock investors. The findings are attributed to earnings persistence; even if losses are not persistent on an aggregate level, it may be the case that individual earnings items can provide information with respect to the future cash flow-generating capabilities of the firm.