Firm-specific estimates of differential persistence and their incremental usefulness for forecasting and valuation

Andrew C. Call, Max Hewitt, Terry Shevlin, Teri Lombardi Yohn

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

Although the differential persistence of accruals and operating cash flows is a firm-specific phenomenon, research seeking to exploit the differential persistence of these earnings components typically employs cross-sectional forecasting models. We find that a model based on firm-specific estimates of the differential persistence of accruals and operating cash flows is incrementally useful for out-of-sample forecasting relative to state-of-the-art cross-sectional models. In doing so, we show that firm-specific estimates of differential persistence are particularly useful when forecasting earnings for more stable firms (e.g., more profitable, lower growth, and less levered firms). We also demonstrate that a trading strategy exploiting investors' fixation on earnings and based on firm-specific estimates of differential persistence earns statistically and economically significant excess returns that are incremental to those generated by trading strategies based on the size of accruals. These results suggest that firm-specific estimates of differential persistence are incrementally informative for forecasting and valuation.

Original languageEnglish (US)
Pages (from-to)811-833
Number of pages23
JournalAccounting Review
Volume91
Issue number3
DOIs
StatePublished - May 2016

Keywords

  • Accruals
  • Differential persistence
  • Firm-specific estimates
  • Operating cash flows

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Firm-specific estimates of differential persistence and their incremental usefulness for forecasting and valuation'. Together they form a unique fingerprint.

  • Cite this