Conditional persistence of earnings components and accounting anomalies

Amir, E, Kama, I and Levi, S (2015) Conditional persistence of earnings components and accounting anomalies. Journal of Business Finance and Accounting, 42 (7-8). pp. 801-825. ISSN 0306-686X

Abstract

We suggest that the failure of investors to distinguish between an earnings component's autocorrelation coefficient (unconditional persistence) and the marginal contribution of that component's persistence to the persistence of earnings (conditional persistence) provides a partial explanation of post‐earnings‐announcement drift, post‐revenue‐announcement drift, and the accrual anomaly. When the conditional persistence of revenue surprises is high (low) relative to its unconditional persistence, both the post‐earnings‐announcement drift and the post‐revenue‐announcement drift are high (low), because investors’ under‐reaction to revenues and earnings is stronger when the persistence of revenue surprises is more strongly associated with the persistence of earnings surprises. Also, the mispricing of accruals decreases substantially when the conditional persistence of accruals is high relative to its unconditional persistence, because investors’ over‐reaction to accruals is mitigated when the persistence of accruals is indeed more strongly associated with the persistence of earnings. Our findings also suggest that financial analysts’ failure to distinguish between unconditional and conditional persistence of revenues and accruals results in more biased revenue and earnings predictions

More Details

Item Type: Article
Subject Areas: Accounting
Additional Information:

© 2015 John Wiley

Date Deposited: 14 Oct 2019 09:52
Subjects: Investment appraisal
Disclosure of financial information
Last Modified: 31 Mar 2024 01:39
URI: https://lbsresearch.london.edu/id/eprint/1234
More

Export and Share


Download

Full text not available from this repository.

Statistics

Altmetrics
View details on Dimensions' website

Downloads from LBS Research Online

View details

Actions (login required)

Edit Item Edit Item