Implication of Retained
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The Implications of Retained and Distributed Earnings for Future Profitability and Market Mispricing*
George Papanastasopoulos Department of Economics School of Management and Economics University of Peloponnese Tripolis Campus, 22100, Greece Department of Banking and Financial Management University of Piraeus 80, Karaoli & Dimitriou Street, Piraeus, 18534, Greece E-mail: papanast@uop.gr Dimitrios Thomakos Department of Economics School of Management and Economics University of Peloponnese Tripolis Campus, 22100, Greece E-mail: thomakos@uop.gr Tao Wang Department of Economics Queens College City University of New York Flushing, NY 11367, U.S.A. E-mail: tao.wang@qc.cuny.edu First Draft: January 31, 2006 Current Draft: April 14, 2006
*
The authors appreciate helpful comments from the seminar participants at the City University of New York. The authors also thank Gikas Hardouvelis and Yochanan Shachmurove for insightful comments and suggestions. The usual disclaimer applies. Corresponding Author.
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The Implications of Retained and Distributed Earnings for Future Profitability and Market Mispricing Abstract: In this paper, we investigate the informational content of retained and distributed earnings for future profitability and market mispricing. It is found that there are systematic differences in the persistence among the components of retained earnings (current operating accruals, non current operating accruals and retained cash flows) and between the components of distributed earnings (cash flows distributed to debtholders and equityholders). The overall sustainability of retained earnings is less than that of distributed earnings. Moreover, investors similarly overestimate the differential persistence of each component of retained earnings. They also do not distinguish between the distinct properties of distributed earnings, correctly anticipate the persistence of cash distributions to debtholders and underestimate only the persistence of cash...
George Papanastasopoulos Department of Economics School of Management and Economics University of Peloponnese Tripolis Campus, 22100, Greece Department of Banking and Financial Management University of Piraeus 80, Karaoli & Dimitriou Street, Piraeus, 18534, Greece E-mail: papanast@uop.gr Dimitrios Thomakos Department of Economics School of Management and Economics University of Peloponnese Tripolis Campus, 22100, Greece E-mail: thomakos@uop.gr Tao Wang Department of Economics Queens College City University of New York Flushing, NY 11367, U.S.A. E-mail: tao.wang@qc.cuny.edu First Draft: January 31, 2006 Current Draft: April 14, 2006
*
The authors appreciate helpful comments from the seminar participants at the City University of New York. The authors also thank Gikas Hardouvelis and Yochanan Shachmurove for insightful comments and suggestions. The usual disclaimer applies. Corresponding Author.
1
The Implications of Retained and Distributed Earnings for Future Profitability and Market Mispricing Abstract: In this paper, we investigate the informational content of retained and distributed earnings for future profitability and market mispricing. It is found that there are systematic differences in the persistence among the components of retained earnings (current operating accruals, non current operating accruals and retained cash flows) and between the components of distributed earnings (cash flows distributed to debtholders and equityholders). The overall sustainability of retained earnings is less than that of distributed earnings. Moreover, investors similarly overestimate the differential persistence of each component of retained earnings. They also do not distinguish between the distinct properties of distributed earnings, correctly anticipate the persistence of cash distributions to debtholders and underestimate only the persistence of cash...