The Differential Effects of Unexpected Permanent and Transitory Earnings Changes on Equity Returns

This study characterizes the new information contained in an earnings announcement based on the degree to which the new information perturbs expectations of earnings. New information is categorized as either permanent or transitory, depending on the degree to which the new information is associated with changes in earnings expectations. The differential impact of the categories of new information on a firm's value is modeled, and the effect of nonrecurring items on earnings expectations is studied. Hypotheses are formulated from the analysis. A market-based research design is constructed to test the hypotheses. The design uses standardized abnormal returns from a market model to surrogate changes in firm value, and forecasts from the Value Line Investment Survey to proxy market earnings expectations. Parametric and nonparametric tests are utilized in testing the hypotheses. The results of the empirical tests provide evidence that unexpected changes in permanent components of earnings have a greater impact on firm value than unexpected changes in transitory components. The results also support the hypothesis that revisions in market expectations of earnings are greater for firms which disclose earnings figures which contain nonrecurring items than for other firms.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Accountancy

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Regier, Philip Roger

• Business Administration, Accounting

Identifier

(UMI)AAI8711859

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/71401