eThesis - School of Business electronic theses

The aim of this study is to find out how earnings properties have developed between years 1988-2012 and further examine impact of economic fluctuations on earnings properties of American S&P 500 companies. In this paper term earnings properties includes levels of cash flows, accruals and earnings. Based on these level -variables are also calculated persistence -values and firm specific volatilities, which are also examined. This study investigates how these variables react to economic trends. Beside these core questions also development and role of special items in determination of earnings is also discussed.

This study employs data from WRDS -database. The final sample consists of companies listed in S&P 500 -index in the year 1988. List of firms is fixed in the situation in the year 1988 and possible changes of list are ignored. Because of this practice, number of firms decreases yearly. In ac-cordance with previous practice, all financial companies and companies with insufficient data were excluded. Finally, data in the year 1988 consists of 420 firms and in the end of the investigation period, year 2012, is remaining 205 companies. When taking into consideration investigation period of 25 years, this study employs 7732 firm-years. Due to the calculation methods of different variables, values for different variables are available starting from different years. Levels are avail-able starting the year 1988, persistence -values from the year 1989 and volatilities from the year 1992. The development of earnings properties was tested by paired two-sample t-tests and link be-tween GDP change and different variables was examined by correlation analyses.

The findings of this study show that levels of cash flows are stable despite the economic trends. Levels of accruals and earnings vary more, but there are no signs of permanent change of these levels. These level -variables do not react clearly on changes of GDP. Smoothness of levels of cash flows emphasizes role of accruals in earnings determination. The results reinforce the fact of accruals lower persistence. The gap between persistence -values of accruals and cash flows has grown between years 1989 and 2012, but this growth is not statistically significant. According to this study, persistence -values do not react on economic trends. Volatilities of accruals and earnings have grown during the investigation period and moreover these variables are negatively correlated with GDP change. Additional findings indicate that frequency of reporting special items has grown substantially.