Earnings Persistence

Dichev and Tang (2008) (this issue) document the incremental predictive power of past earnings volatility for the persistence of current earnings. We revisit their findings by allowing for several theoretically motivated factors (firm size, earnings growth, and the extent of managerial accounting discretion as detected by abnormal accruals) in order to verify the robustness of this effect. We also study if the predictive power of past earnings volatility is priced in stock returns. Our findings indicate that the predictive power of past earnings volatility is robust to the additional controls and to a correction for sampling bias. We also find that the incremental predictive power of past earnings volatility for current earnings persistence is not reflected in stock returns. * We thank Xiumin Martin, Sugata Roychowdury, and Jerry Zimmerman for helpful discussions. All remaining errors of course are our own. 1