An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Patricia M. Fairfield
Georgetown University

Wei (Vicki) Tang
Georgetown University

Karen A Taranto
Georgetown University

Abstract: Research shows that special items are less likely than core earnings to persist into the next year. The allocation of special items to periodic earnings entails significant measurement error, however. We investigate whether the differential persistence of core earnings and special items diminishes as they are measured over longer periods. We find special items for firms with low core (pre-special items) profitability have no association with future earnings even when aggregated over five year windows. We conclude the low persistence of special items is an important characteristic of the underlying data and is not attributable to measurement error for low profitability firms. In contrast, negative special items exhibit significant persistence and are associated with lower future earnings for high core profitability firms. We conclude that for these firms, negative special items do not differ from core earnings after controlling for the measurement error in the cost allocation process.

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