Core earnings: New data and evidence

Ethan Rouen, Eric C. So and Charles C.Y. Wang

Journal of Financial Economics, 2021, vol. 142, issue 3, 1068-1091

Abstract: Using a novel dataset, we show that components of firms’ GAAP earnings stemming from ancillary business activities or transitory shocks are significant in frequency and magnitude. These components have grown over time and are dispersed across various sections of the 10-K. Excluding them from GAAP earnings yields a core earnings measure that distinguishes between the recurring and non-recurring components of net income and forecasts future performance. Analysts and market participants are slow to impound these earnings components’ implications, particularly the amounts disclosed in the footnotes. Trading strategies that exploit non-core earnings produce abnormal returns of 8% per year.

Keywords: Core earnings; Transitory earnings; Non-operating earnings; Quantitative disclosures; Information processing; Fundamental analysis; Valuation (search for similar items in EconPapers)
JEL-codes: C14 G10 G18 M40 M41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:3:p:1068-1091

DOI: 10.1016/j.jfineco.2021.04.025

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