Debiasing earnings persistence estimates

Brian Rountree (), Konduru Sivaramakrishnan, Yanyan Wang () and Lisheng Yu ()
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Brian Rountree: Rice University
Konduru Sivaramakrishnan: Rice University
Yanyan Wang: Xiamen University
Lisheng Yu: Business School, Sun Yat-sen University

Review of Accounting Studies, 2024, vol. 29, issue 4, No 8, 3258-3292

Abstract: Abstract This study provides a theoretical framework to help isolate persistence estimates of earnings innovations from the effects of accounting measurements. We show that estimates of persistence are biased downward when using reported earnings because of the presence of accrual estimation errors. The greater the errors, the greater the downward bias, which explains the empirically observed positive association between accrual quality and estimated earnings persistence. However, when we debias reported earnings persistence as guided by our theoretical framework, we fail to detect any such association and find that the debiased persistence measure better captures fundamental persistence as evidenced by its incremental association with market returns.

Keywords: Accrual quality; Persistence; Reporting quality; Valuation (search for similar items in EconPapers)
JEL-codes: D21 D22 M41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-023-09789-2

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