The Information Content of Negative Earnings and its Relation with Initial-Loss Persistence

Abstract

This study examines the information content of negative earnings and the relation between that information content and the persistence of negative earnings. Recent studies have found evidence that negative earnings convey significantly less information than positive earnings. One reason for this result may be the difference between the expected persistence of gains and losses. This study extends prior literature by studying the relation between negative earnings and persistence. I first provide evidence of the information content of initial-loss-year earnings. I then develop evidence that the information content of losses is related to the persistence of the loss. Specifically, I find that initial losses from single-year loss periods have less information content than initial losses from multi-year loss periods. Second, I find evidence that initial losses have significantly more information content than subsequent losses. Third, I find a significant difference in the information content of losses across groups of firms with different levels of initial-loss persistence. The study concludes with an examination of the potential usefulness of financial statement information for predicting initial-loss persistence.

JEL Classification: M41, G12