Earnings Decomposition, Value Relevance and Predictability

Abstract

Compared with net earnings, the components of earnings are more informative in companies whose components have different qualities of persistence and volatility. We examine the issue of whether net earnings together with their components have more information content than only net earnings. We construct a model to describe the effect of components volatility and their persistence through disaggregation of earnings value relevance and predictability. The analyses in our study are based on 600 firm-year observations in Tehran Stock Exchange (TSE) for the period 2005- 2019. Data are derived from RAHAVARD NOVIN Iranian software and firms' financial statements. The statistical tests for data analyses are the difference of means test (t-test) and regression analyses. The results of the current study indicate that as the persistence and volatility of selected components of earnings (sales, employee expenses, other selling, general and administrative expenses, and income taxes) increase, earnings disaggregation can improve earnings predictability. Furthermore, when the volatility of employee expenses increases, disaggregated earnings can improve earnings value relevance. As the value relevance of net earnings has been declined over the past decades, the results of the current study suggest that earnings disaggregation plays a major role in improving earnings value relevance and their predictability.