The value relevance of losses revisited: the importance of earnings aggregation

Abstract

Prior research has suggested that earnings explain a larger portion of the variation in stock returns when disaggregated into components. This study shows that the increase in explanatory power stems primarily from disaggregation of negative earnings. When accounting earnings are sufficiently disaggregated into items, there is no longer a statistical difference in the value relevance of positive and negative earnings. Thus, negative earnings are also useful to stock investors. The findings are attributed to earnings persistence; even if losses are not persistent on an aggregate level, it may be the case that individual earnings items can provide information with respect to the future cash flow-generating capabilities of the firm. *I would like to thank Frøystein Gjesdal, Kjell H. Knivsflå, John C. Langli, Peder FredslundMøller, Frank Thinggaard, Ken Peasnell and three anonymous referees for helpful suggestions and comments. JEL Classification Code: M41 Accounting

Perception of negative earnings persistence and value relevance: Evidence from Zimbabwe

“…Ahmadi (2017) also found that value relevance declined when firms had negative earnings. Contrary to these researchers' findings, Beisland (2011) found that disaggregated negative earnings are equally value relevant, arguing that losses provide information relevant to firm valuation. Lack of persistence of negative earnings is cited in literature as the main reason why losses are deemed not value relevant (Barth et al, 2005;Carnes, 2006).…”

“…In the dummy variables regression models, the dummy variable is significant at 1% level and all robustness checks show that the models are quite robust. The findings both confirm and contradict what other scholars found out: they are contrary to scholars like Kwon (2017) and Venter et al (2014) but are consistent with Beisland (2011) and Jahmani et al (2017). This research rejects the hypothesis that the market punishes loss firms, resulting in lack of value relevance of negative earnings.…”

“…Of the three reasons suggested, what is clear on the ZSE is the increase in loss of firms due to the challenging economic environment in Zimbabwe and the effect of this has not been documented yet. Beisland (2011) posits that value relevance of earnings is linked to earnings persistence, arguing that losses are not expected to persist. This purported lack of persistence then causes losses not to be value relevant.…”

“…Literature documents that value relevance is heavily linked to the persistence of earnings, i.e. persistent earnings provide information for future firm performance (Beisland, 2011). This research focuses on the perception of loss persistence by dividing the sample into profit firms and firms that report losses "quite often".…”