Accounting classification and the predictive content of earnings

Article Abstract:

The disaggregation of net income into specific components has been accepted in the accounting profession as playing a role in assessing firm profitability despite the absence of solid empirical evidence supporting this notion. In light of this, a study was conducted to investigate if the line items on the income statement can be employed to enhance forecasts of future profitability. An analysis of accuracy improvements in out-of-sample forecasts of one-year ahead return-on-equity (ROE) shows that the classification scheme advocated by the accounting field raises the predictive content of reporting earnings. Forecasting improvements from earning disaggregation were found, which go beyond the isolation of extraordinary items and discontinued operations from the other earnings components. Further disaggregation resulted in improved forecasts of ROE a year ahead.

Forecasts and trends, Profits, Financial statements, Corporation reports, Company reports, Business forecasting, Corporate profits

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The effect of concern about reported income on discretionary spending decisions: the case of research and development

Article Abstract:

The influence of reporting favorable forecasts of accounting net earnings on research and development (R&D) investment decisions is examined in this study. Emphasis is on the function of these investment decisions as tools for attaining target profits. When R&D spending poses a threat to favorable reporting of income, a decrease in the amount of spending is observed. Differences in R&D spending can be traced to explicit compensation systems. Investment decisions for R&D tend to take greater consideration of the effects of earnings for a current period .

Accounting, auditing, & bookkeeping, Finance, Industrial research, Accounting firms, Accounting services, Capital investments

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The explanatory power of earnings levels vs. earnings changes in the context of executive compensation

Article Abstract:

Research presented concerns the relationship between accounting earnings and chief executive officer compensation. The influence of earnings levels, earnings changes, and earnings persistence on compensation is studied.

United States, Statistical Data Included, Compensation and benefits, Compensation management, Executives, Executive compensation, Chief executive officers

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