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Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items

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  • Edward J. Riedl

    (Harvard Business School, Accounting and Management Unit)

  • Suraj Srinivasan

    (Harvard Business School, Accounting and Management Unit)

Abstract

This paper investigates whether presentation of special items within the financial statements reflects the firm's underlying economic performance or opportunism. We examine the presentation of recognized special items either as a separate line item on the income statement or aggregated within another line item with disclosure only in the footnotes. Our study is motivated by standard-setting interest in performance reporting and financial statement presentation, as well as prior research investigating managers' presentation choices in other contexts. Using different constructs of persistence to capture the economics of reported special items, we find evidence consistent across a range of specifications that special items highlighted on the income statement are more transitory than those revealed only in the footnotes. For most special items, these results are consistent with this presentation decision reflecting underlying firm performance. For a subset observations - namely, those likely to reflect "big bath" reporting incentives - we provide limited evidence suggestive of opportunism in this presentation decision.

Suggested Citation

  • Edward J. Riedl & Suraj Srinivasan, 2007. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Harvard Business School Working Papers 09-031, Harvard Business School.
    • Handle: RePEc:hbs:wpaper:09-031
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    Cited by:

    1. Patricia M. Fairfield & Karen A. Kitching & Vicki Wei Tang, 2009. "Are special items informative about future profit margins?," Review of Accounting Studies, Springer, vol. 14(2), pages 204-236, September.
    2. Bischof, Jannis & Ebert, Michael, 2007. "IAS 39 and biases in the risk perception of financial instruments," Papers 07-73, Sonderforschungsbreich 504.
    3. Jeffrey L. Callen & Dan Segal & Ole-Kristian Hope, 2010. "The pricing of conservative accounting and the measurement of conservatism at the firm-year level," Review of Accounting Studies, Springer, vol. 15(1), pages 145-178, March.

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