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

Edward Riedl
Harvard Business School

Suraj Srinivasan
University of Chicago

Abstract: This paper examines if managers strategically present recognized special items, and what effect this has on users of this information. We first examine the decision to present special items as a separate line item on the income statement versus aggregated in another line item with identification only via footnote disclosure. Our results suggest that this decision reflects both management intent to selectively emphasize certain types of special items as well as their response to demands for transparent information. A second analysis then reveals significantly higher long-window responses for special items revealed only in the footnotes. However, we then find that these latter special items are more predictive of future earnings, suggesting the higher investor response for footnote special items appears warranted. Overall, our paper presents evidence that managers make active presentation decisions, but that investors appear to respond appropriately.

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