Seminar: Kalin Kolev, Yale University
On the Contemporaneous Reporting of Income-Increasing and Income-Decreasing Special Items: Initial Evidence
Date: April 11, 2014
Time: 11:00 am - 12:30 pm
Location: Room 310
Extant research finds that the use and information content of special items is contingent on their sign. In particular, income-increasing special items are typically attributable to company-initiated transactions and have been linked to boosting reported earnings in an effort to achieve earnings targets. The incidence of income-decreasing special items, however, often depends on factors outside the immediate control of management. More so, as statement users generally discount these items relative to other income statement components, firms have been shown to use income-decreasing special items to shift attention away from bottom line earnings. Anecdotal and empirical evidence, however, suggests that companies often report both types of special items during the same fiscal period, a reporting practice which is counter-intuitive in light of the evidence presented by extant research. In this study we take the first step to shedding light on this puzzling phenomenon. Using a novel dataset based on detailed hand-collected data for a sample of one hundred S&P 500 companies over twenty quarters, we confirm that the concurrent reporting of income-decreasing and income-increasing special items is too frequent to be attributable to chance and explore three potential explanations linked to firm-level economics, equity holders, and debt holders, respectively. Our analysis reveals that the reporting practice is linked to financial health, but we fail to find robust evidence that it is associated with reaching targets typically examined in equity markets research. However, we document that the concurrent reporting of positive and negative special items is related to avoiding debt-covenant violations, as the effect is driven by income-based covenants not shielded from special items and decreases in covenant slack.
For more information, please contact Darlene Fowler at: darlene [dot] fowler [at] mcgill [dot] ca.