The predictive content of one-time accounting items

University essay from Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Abstract: My paper suggests that investors can leverage corporate life cycle theory to enhance their understanding of one-time items, helping them to decide whether those items shall be considered or neglected. One-time revenues are only associated with future performance for longer earnings windows in mature firms. One-time expenses, on the other hand, should primarily be considered for growth and mature businesses, as there is a significant, positive association to future performance for those two life cycle stages. For shake-out enterprises, there appears to be a weak correlation with future earnings in the short-term as well, but this might potentially be a consequence of earnings management. For introduction and decline firms, one-time expenses can be neglected. Extending my analysis by breaking down one-time items into their components, my research indicates deteriorating future performance of introduction firms following PP&E write-offs, while growth firms benefit from in-process R&D and M&A-related gains / losses. Shake-out firms have a higher chance of revival by focusing on in-process R&D and extinguishment of existing debt. Decline businesses can boost future performance by engaging in M&A activity, whereby this result needs to be taken with caution as the sample for declining firms reporting M&A related gains / losses is very small. Finally, my results suggest that goodwill impairment is the only one-time sub-item which shows a significant association to future profit margin in all five life cycle stages, while restructurings only create sustainable value for mature firms.

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