Conditional versus unconditional persistence of RNOA components: implications for valuation

Amir, Eli; Kama, Itay; Livnat, Joshua

doi:10.1007/s11142-010-9138-z

Cited by 28 publications

(19 citation statements)

References 26 publications

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“…4 We hypothesize that historical cost measurement of assets will lead to persistent biases in the asset turnover ratio due to prolonged differences in the monetary basis of sales and assets. Consistent with prior research, we find that asset turnover is more persistent than profit margin and return on net operating assets (e.g., Fairfield and Yohn 2001;Nissim and Penman 2001;Penman and Zhang 2002;Soliman 2008;Amir et al 2011). One explanation for the higher persistence of asset turnover relative to profit margin is that economic rents from physical assets are harder to expropriate than knowledge assets (i.e., Romer 1986).…”

Section: Introductionsupporting

confidence: 85%

Historical cost measurement and the use of DuPont analysis by market participants

2015

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We investigate whether historical cost measurement of assets lowers the usefulness of DuPont analysis for investors. Because firms report assets at modified historical cost under US GAAP, accounting ratios can be biased upward when assets have appreciated. Thus, variation in asset turnover, which is the DuPont ratio most affected by asset measurement, can be due to both economic forces and measurement effects. We assess the extent of measurement effects using the average age of a firm's assets and find that asset turnover ratios are higher and more persistent for firms with older assets. Forecast errors of asset turnover are associated with the change in asset age, and these forecast errors are positively associated with contemporaneous and future returns. Our results are weaker in non-US samples, in part reflecting deflation and upward revaluations, consistent with our US results capturing biased asset turnover ratios due to historical cost measurement.

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Section: Introductionsupporting

confidence: 85%

Historical cost measurement and the use of DuPont analysis by market participants

2015

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“…For example, Lipe [1986] and Sloan [1996] find differences in the persistence of earnings components, suggesting that forecasts should weigh the influence of each component differently. Amir et al [2011] provide evidence that the market reacts differently to the conditional and unconditional persistence of DuPont ratios.…”

Section: Earnings Quality and The Influence On Profitability Forecastsmentioning

confidence: 90%

“…Soliman [2008] finds that analysts and investors do not fully impound the predictive information of PM and ATO in their decision making. Amir et al [2011] differentiate between conditional (power of a DuPont ratio's persistence to explain the persistence of a variable higher up in the DuPont hierarchy) and unconditional persistence (measured as the first-order autocorrelation coefficient) of DuPont ratios and find that RNOA components exhibit varyingly conditional and unconditional persistence. Furthermore, they find that the market's reaction to PM is stronger than to ATO.…”

Section: Forecasting Profitability In the Fsa Literaturementioning

confidence: 94%

Improving Profitability Forecasts with Information on Earnings Quality

Demmer

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractPrior literature documents the usefulness of the DuPont disaggregation for predicting firms' future profitability, operating income, and stock market returns. In addition, research also emphasizes the importance of earnings quality information. However, there is a lack of research examining how earnings quality affects forecasts of profitability. This paper explores whether different earnings quality factors moderate the accuracy of profitability forecasts. This study contributes to the existing literature along three dimensions. First, contrary to financial statement analysis studies, I find that changes in profit margin provide incremental information for predicting changes in future return on assets. After controlling for earnings quality factors, the incremental usefulness of this accounting signal increases significantly. Second, this paper contributes to the earnings quality literature by providing an approach as how to include this information into forecasts of profitability. In doing so, I incorporate the main drivers of earnings quality (i.e. fundamental performance and the accounting system) into profitability forecasts. Last, the paper adds to the literature on how capital market participants perceive accounting information. I document that both analysts and investors appear to efficiently incorporate earnings quality information in their investment decisions. JEL classification: M41

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“…Amir et al (2011) examine the persistence of DuPont ratios. Specifically, they compare unconditional persistence (a variable's…”

Section: Background Prior Research and Motivationmentioning

confidence: 99%

“…Specifically, the relation between changes in PM and one-year-ahead changes in RNOA is re-examined by partitioning on the direction of the change in PM. Such partitioning is motivated by Amir et al (2011), who find that PM contributes more to the persistence of RNOA than ATO. This evidence suggests that information is lost when constraining the coefficient on change in PM to be equal across firms.…”

Section: Introductionmentioning

confidence: 99%

Forecasting operating profitability with DuPont analysis

Bauman

2014

Review of Accounting and Finance

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If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this study is to re-examine the relation between changes in profit margin (⌬PM) and changes in return on net operating assets (⌬RNOA) by partitioning on the direction of the change in PM. DuPont analysis provides a means of disaggregating a firm's return on net operating assets (RNOA) into asset turnover (ATO) and profit margin (PM) components to gain insights into the underlying drivers of operating profitability. Prior research finds that changes in ATO are informative about one-year-ahead changes in RNOA, while changes in PM are not. Design/methodology/approach -Consistent with prior research, regression analysis is used to develop a predictive model for one-year-ahead changes in RNOA. Results based on in-sample parameter estimates are used to examine the out-of-sample forecasting accuracy of alternative model specifications.Findings -The results are consistent with significant forecast improvement resulting from considering the impact on future RNOA of the direction of the ⌬PM. Originality/value -The study contributes to the literature on the determinants of profitability ratios by providing further guidance on how financial statement information can be utilized to improve forecasts of firm performance.

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Conditional versus unconditional persistence of RNOA components: implications for valuation

Cited by 28 publications

References 26 publications

Historical cost measurement and the use of DuPont analysis by market participants

Historical cost measurement and the use of DuPont analysis by market participants

Improving Profitability Forecasts with Information on Earnings Quality

Forecasting operating profitability with DuPont analysis

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