Test of functional fixation hypothesis; case of continuous and non-continuous component of earnings

In this paper the functional fixation hypothesis is tested from investors’ viewpoint for separation of continuous and noncontinuous components of earnings. The functional fixation hypothesis states that investors interpret earnings regardless of related accounting methods and persistence of its component. So naive investors do not analyze earnings figures in detail (ie, continuous and non-continuous components) and instead they focus on the bottom line. Furthermore, the literature argues that non-continuous component has less persistence than continuous component and non-continuous component growth in current period which leads to low returns in future. The functional fixation hypothesis was tested using the data of 153 listed companies quoted in the TSE for 7 years (1382- 1389). Our findings show that there is a powerful evidence for the hypothesis explanatory power.