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Debiasing earnings persistence estimates

Author

Listed:
  • Brian Rountree

    (Rice University)

  • Konduru Sivaramakrishnan

    (Rice University)

  • Yanyan Wang

    (Xiamen University)

  • Lisheng Yu

    (Business School, Sun Yat-sen University)

Abstract

This study provides a theoretical framework to help isolate persistence estimates of earnings innovations from the effects of accounting measurements. We show that estimates of persistence are biased downward when using reported earnings because of the presence of accrual estimation errors. The greater the errors, the greater the downward bias, which explains the empirically observed positive association between accrual quality and estimated earnings persistence. However, when we debias reported earnings persistence as guided by our theoretical framework, we fail to detect any such association and find that the debiased persistence measure better captures fundamental persistence as evidenced by its incremental association with market returns.

Suggested Citation

  • Brian Rountree & Konduru Sivaramakrishnan & Yanyan Wang & Lisheng Yu, 2024. "Debiasing earnings persistence estimates," Review of Accounting Studies, Springer, vol. 29(4), pages 3258-3292, December.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:4:d:10.1007_s11142-023-09789-2
    DOI: 10.1007/s11142-023-09789-2
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    More about this item

    Keywords

    Accrual quality; Persistence; Reporting quality; Valuation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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