Does Classifying Earnings into Operating, Investing, and Financing Categories Enhance Earnings Informativeness? Evidence from Applying IFRS 18 to U.S. Data
Lidong Cui, Steve Lin, Ya-wen YangSYNOPSIS
This study examines whether classifying earnings into operating, investing, and financing categories, based on the IFRS 18 framework, improves earnings informativeness for U.S. firms. Using Compustat data from 2003 to 2023, we reclassify GAAP-based earnings components into IFRS 18 categories and construct mandated subtotals—operating profit and profit before financing and income taxes—while holding recognition and measurement constant. We find that this classification yields modest improvements in out-of-sample forecasts of future performance and returns. It also produces statistically significant, although economically small, improvements in explanatory power for stock returns, analyst forecast accuracy and dispersion, as well as higher cross-firm comparability. Overall, the results are consistent with the idea that organizing earnings into economically meaningful categories is associated with modest improvements in the informativeness and comparability of U.S. financial reporting.