The predictive ability and information content of aggregate earnings beyond disaggregate earnings

The predictive ability and explanatory power of an aggregate model of reported earnings is compared to a disaggregated model of reported earnings by examining their associations with contemporaneous stock returns and future earnings. The change in annual reported earnings is disaggregated into changes in revenue, operating margin, and other expenses in order to examine whether they individually and jointly convey information about future earnings that is not reflected in aggregate earnings and whether this incremental predictive ability is reflected in security prices. This study contributes to the information content literature in two ways. First, it examines the information and valuation link between the operating income components of reported earnings and future earnings and stock returns. Second, the empirical analysis is conducted on an industry basis and over a eight-year period to examine how the predictive ability and information content of earnings and its components vary across industries and over time. The results indicate the following. First, changes in revenue, operating margin, and other expenses (the disaggregated model) jointly have not predictive ability and information content beyond the change in aggregate reported earnings with respect to one-year ahead annual earnings and contemporaneous annual stock returns. Second, the predictive ability and, information content of these earnings components as well as aggregate earnings varies across industries and varies over time.