Graduation Year

2016

Date of Submission

4-2016

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

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Rights Information

© 2016 Andrew B. Sova

Abstract

With increasing scrutiny over standards of financial statement transparency, this paper attempts to resolve misconceptions about effects of negative special items on future earnings. Value investor Benjamin Graham advises students to avoid firms that consistently post special items, because it is indicative of the volatility of the business. Using panel data from 2003 to 2014 and a regression structure used by Burghstaler et al. (2002), I find in contrast to Graham’s warning, that negative special items significantly increase earnings in the four quarters following its occurrence. Furthermore, I analyze results by sector and find that negative special items in the Information Technology sector have the most dramatic positive effects on future earnings. This study gives investors more insight as to what negative special items mean for future earnings of a company.

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