Core Earnings: New Data and Evidence
71 Pages Posted: 11 Oct 2019 Last revised: 24 Nov 2020
Date Written: November 20, 2020
Using a novel dataset, we show that components of firms' GAAP earnings stemming from ancillary business activities or transitory shocks are significant in frequency and magnitude. These components have grown over time and are dispersed across various sections of the 10-K. Excluding them from GAAP earnings yields a core earnings measure that distinguishes between the recurring and non-recurring components of net income and forecasts future performance. Analysts and market participants are slow to impound these earnings components' implications, particularly the amounts disclosed in footnotes. Trading strategies that exploit non-core earnings produce abnormal returns of 8% per year.
Keywords: Core Earnings, Transitory Earnings, Non-Operating Earnings, Quantitative Disclosures, Equity Valuation, Big Data
JEL Classification: C14, G10, G18, M40, M41
Suggested Citation: Suggested Citation