Repeated Accounting Write-Offs and the Information Content of Earnings

Abstract

This paper examines the information content of earnings conditional on the presence of large nonrecurring or unusual charges. We also investigate the incremental information content of these special items. Of particular interest to us is whether investors view earnings differently after firms report large nonrecurring charges. Using quarterly Compustat data, we categorize firm-quarters according to the frequency with which firms report large special items during 1975-94 (defined as those in excess of 1% of total assets). We document the increasing frequency of reported special items, both positive and negative, during this period, noting that the increase in the frequency with which firms report negative special items (write-offs) is up to three times higher than the incidence of positive special items, and the divergence has increased. Three recent Wall StreetJournal articles exemplify the investing community's reaction to the announcement of multiple, or sequential, write-offs.