TY - JOUR
T1 - Disaggregating operating and financial activities
T2 - Implications for forecasts of profitability
AU - Esplin, Adam
AU - Hewitt, Max
AU - Plumlee, Marlene
AU - Yohn, Teri Lombardi
PY - 2014/3
Y1 - 2014/3
N2 - Researchers, practitioners, and standard setters emphasize the importance of disaggregating financial statements into operating and financial activities. However, there is a lack of research demonstrating that this disaggregation improves forecasts of profitability. In this study, we consider whether and when the operating/financial disaggregation improves forecasts of profitability. Contrary to the use of an aggregate forecasting approach by most related prior research, we first show that the operating/financial disaggregation only provides forecast improvement over a benchmark model incorporating aggregate information when the components forecasting approach is used. We also compare the operating/financial disaggregation to the unusual/infrequent disaggregation required by US GAAP. We find that the operating/financial disaggregation yields less accurate forecasts than the unusual/infrequent disaggregation. However, when using the components forecasting approach, we find that the combination of both disaggregations improves forecasts of profitability. Finally, we document that the incremental usefulness of the operating/financial disaggregation relative to a benchmark model incorporating aggregate information is a function of growth and accounting conservatism. Overall, our study provides timely evidence concerning how analysts and investors might best use the operating/financial disaggregation for forecasting profitability.
AB - Researchers, practitioners, and standard setters emphasize the importance of disaggregating financial statements into operating and financial activities. However, there is a lack of research demonstrating that this disaggregation improves forecasts of profitability. In this study, we consider whether and when the operating/financial disaggregation improves forecasts of profitability. Contrary to the use of an aggregate forecasting approach by most related prior research, we first show that the operating/financial disaggregation only provides forecast improvement over a benchmark model incorporating aggregate information when the components forecasting approach is used. We also compare the operating/financial disaggregation to the unusual/infrequent disaggregation required by US GAAP. We find that the operating/financial disaggregation yields less accurate forecasts than the unusual/infrequent disaggregation. However, when using the components forecasting approach, we find that the combination of both disaggregations improves forecasts of profitability. Finally, we document that the incremental usefulness of the operating/financial disaggregation relative to a benchmark model incorporating aggregate information is a function of growth and accounting conservatism. Overall, our study provides timely evidence concerning how analysts and investors might best use the operating/financial disaggregation for forecasting profitability.
KW - Disaggregation
KW - Financial
KW - Operating
KW - Profitability
UR - http://www.scopus.com/inward/record.url?scp=84893920397&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84893920397&partnerID=8YFLogxK
U2 - 10.1007/s11142-013-9256-5
DO - 10.1007/s11142-013-9256-5
M3 - Article
AN - SCOPUS:84893920397
VL - 19
SP - 328
EP - 362
JO - Review of Accounting Studies
JF - Review of Accounting Studies
SN - 1380-6653
IS - 1
ER -