Title: The value relevance of losses revisited: the importance of earnings aggregation

Authors: Leif Atle Beisland

Addresses: Faculty of Economics and Social Sciences, University of Agder, 4604 Kristiansand, Norway

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.

Keywords: value relevance; earnings persistence; cash flow; accruals; losses; accounting; financial reporting; stock returns; disaggregation; negative earnings.

DOI: 10.1504/GBER.2011.040728

Global Business and Economics Review, 2011 Vol.13 No.2, pp.126 - 146

Received: 25 Sep 2009
Accepted: 24 Oct 2010

Published online: 23 Sep 2014 *

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