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  • Article
  • Journal of Financial Economics

Core Earnings: New Data and Evidence

By: Ethan Rouen, Eric C. So and Charles C.Y. Wang
  • Format:Print
  • | Pages:71
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Abstract

Using a novel dataset, we show that components of firms' GAAP earnings stemming from ancillary business activities or transitory shocks are significant in frequency and magnitude. These components have grown over time and are dispersed across various sections of the 10-K. Excluding them from GAAP earnings yields a core earnings measure that distinguishes between the recurring and non-recurring components of net income and forecasts future performance. Analysts and market participants are slow to impound these earnings components' implications, particularly the amounts disclosed in footnotes. Trading strategies that exploit non-core earnings produce abnormal returns of 8% per year.

Keywords

Core Earnings; Transitory Earnings; Non-operating Earnings; Quantitative Disclosures; Equity Valuation; Big Data; Business Earnings; Financial Reporting; Valuation

Citation

Rouen, Ethan, Eric C. So, and Charles C.Y. Wang. "Core Earnings: New Data and Evidence." Journal of Financial Economics 142, no. 3 (December 2021): 1068–1091.
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About The Authors

Ethan C. Rouen

Accounting and Management
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Charles C.Y. Wang

Accounting and Management
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More from the Authors
  • Passing the Mic: Career and Firm Outcomes of Executive Interactions By: Wei Cai, Ethan Rouen and Yuan Zou
  • How Much Should We Trust Staggered Difference-In-Differences Estimates? By: Andrew C. Baker, David F. Larcker and Charles C.Y. Wang
  • Corporate Governance in Business Analysis and Valuation By: Charles C.Y. Wang
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