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Is Standard & Poor’s Core Earnings Useful: Evidence from Bankruptcy Prediction
Mark C Dawkins,
University of Georgia
Dahlia Robinson, Arizona State University
Michael T Dugan, University of Alabama
ABSTRACT. In 2002 Standard & Poor’s (S&P) released a new measure of corporate earnings called Core Earnings. The stated intent was to improve U.S. financial reporting by providing a uniform measure of earnings, where uniformity would ostensibly provide a better and more consistent indicator of firms’ future earnings and performance relative to GAAP earnings. In this study we assess the usefulness of Core Earnings relative to GAAP earnings in predicting bankruptcy by comparing the prediction accuracy of GAAP earnings and Core Earnings in logit hazard models of Altman’s (1968) Z-Score model, Ohlson’s (1980) O-Score model, and Zmijewski’s (1984) I-Score model. Our analysis tests each GAAP and Core Earnings model with original coefficients, and revised models with updated coefficients. Overall, the results suggest that Core Earnings does not improve bankruptcy prediction relative to GAAP earnings.
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