Strategic Disclosure of Transitory Items
The market valuation of a firm depends on investors’ ability to distinguish between the permanent (recurring) and transitory components of the firm’s earnings (Kormendi and Lipe (1987)). A dollar of permanent earnings should increase prices considerably more than a dollar of transitory earnings. When managers wish to increase their firm’s short-term price, they could provide poor/meager disclosures about transitory gains/income. By not transparently disclosing the transitory nature of gains, firms can potentially fool investors into believing that their recurring earnings are higher than what it truly is. A second strategy that firms could adopt is to deliberately classify recurring expenses as non-recurring.
Strategic Disclosure of Transitory Items
Project Team: | Srinivasan Rangan and Prabhu Venkatachalam |
Sponsor: | IIM Bangalore |
Project Status: | Ongoing (Initiated in November 2021) |
Area: | Finance & Accounting |
Abstract: | The market valuation of a firm depends on investors’ ability to distinguish between the permanent (recurring) and transitory components of the firm’s earnings (Kormendi and Lipe (1987)). A dollar of permanent earnings should increase prices considerably more than a dollar of transitory earnings. When managers wish to increase their firm’s short-term price, they could provide poor/meager disclosures about transitory gains/income. By not transparently disclosing the transitory nature of gains, firms can potentially fool investors into believing that their recurring earnings are higher than what it truly is. A second strategy that firms could adopt is to deliberately classify recurring expenses as non-recurring. |