Detecting Opportunistic Special Items

63 Pages Posted: 20 Sep 2008 Last revised: 17 Jan 2019

See all articles by Carol Anilowski Cain

Carol Anilowski Cain

Winston-Salem State University

Kalin S. Kolev

City University of New York (CUNY) - Stan Ross Department of Accountancy

Sarah E. McVay

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2018

Abstract

The frequency of special items has increased dramatically over time, offering a convenient conduit for the inappropriate classification of past, present, and future recurring expenses as non-recurring. Identifying this misclassification is especially important in light of the pervasive use of non-GAAP earnings in recent periods, as special items offer camouflage for excluded recurring expenses. Building on prior research, we propose a method for identifying the predicted level of special items, attributing any excess to opportunism, and demonstrate the importance of this partitioning for financial statement users. In particular, we provide evidence that the opportunistic portion of special items is associated with lower future earnings, cash flows, and returns. We conclude that this portion of special items is more likely to contain opportunistically misclassified recurring expenses that should have been recognized as such in prior, current, or future periods. Thus, we provide a meaningful partition of special items that should be useful to investors, analysts, creditors, auditors, and regulators, as each of these parties must assess the implications of special items.

Keywords: Special items, transitory items, earnings quality, earnings management, future operating cash flows, restatements

JEL Classification: M41, M43

Suggested Citation

Anilowski Cain, Carol and Kolev, Kalin S. and McVay, Sarah E., Detecting Opportunistic Special Items (December 19, 2018). Baruch College Zicklin School of Business Research Paper No. 2019-01-01, Available at SSRN: https://ssrn.com/abstract=1267022 or http://dx.doi.org/10.2139/ssrn.1267022

Carol Anilowski Cain

Winston-Salem State University ( email )

601 Martin Luther King, Jr. Dr.
RJR 126
Winston-Salem, NC 27110
United States

Kalin S. Kolev (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Sarah E. McVay

University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://https://foster.uw.edu/faculty-research/directory/sarah-mcvay/

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