The market pricing of negative special items through time: an unintended consequence of regulation change?
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Prior research concludes that the implications of negative special items (NSIs) for future earnings are more fully reflected than earnings before NSIs. Our evidence suggests that US regulatory changes resulted in dramatic increases (decreases) in NSI reporting frequency (magnitude). We find that the advantage in pricing NSIs relative to other components of earnings disappears for the average firm post-regulation and for high frequency NSI reporters regardless of time period. Our evidence suggests that regulations governing the financial reporting of NSIs resulted in unintended consequences by impairing the ability of market participants to understand the future earnings implications of these items.
KeywordsSpecial items Earnings components Restructuring Goodwill impairment Special item reporting frequency Financial regulation Unintended consequence
JEL ClassificationG30 G14 G34 M41
We thank Steve Lin, Ovee Barua, Terry Shevlin, Jenny Tucker Wu, Partha Mohanram, Kelvin Liu and workshop participants at Florida International University, Oklahoma State University, Shanghai University of Finance and Economics, the 2012 AAA Annual Meeting, especially discussant Jim Naughton, and the 2013 McMaster University Accounting Symposium, for comments on early drafts of this manuscript.
Data are available from public sources identified in the paper.
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