Special Items: Implications for Forecasting
53 Pages Posted: 18 Apr 2022 Last revised: 19 Oct 2023
Date Written: April 5, 2022
Abstract
Earnings estimates are often calculated as the product of sales and profit margin forecasts. The profit margin is predicted based on its past levels and other relevant information. A key component of such information is whether and the extent to which the company has recognized special items (e.g., restructuring charges, goodwill impairment, asset write-downs, M&A costs). This study provides evidence on the implications of past and current levels of different types of special items for future profit margins. It concludes that, when evaluating profitability and for forecasting, most special items should be smoothed over time, with greater weights applied to recent years, rather than be treated as transitory.
Keywords: Special items, restructuring, impairment, goodwill, write-down, M&A, profitability, forecasting, financial statement analysis, earnings persistence, earnings quality, valuation
JEL Classification: G12, G17, G31, G32, M41
Suggested Citation: Suggested Citation