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IIMB Management Review

Journal of Indian Institute of Management Bangalore

IIM Bangalore offers Degree-Granting Programmes, a Diploma Programme, Certificate Programmes and Executive Education Programmes and specialised courses in areas such as entrepreneurship and public policy.

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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.

Project Team
Srinivasan Rangan and Prabhu Venkatachalam
Sponsor
IIM Bangalore
Select Project Type
Ongoing Projects
Project Status
Ongoing (Initiated in November 2021)
Funded Projects Functional Area
Finance & Accounting

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.