Purchase Obligations, Earnings Persistence and Stock Returns

This paper examines whether the disclosure of purchase obligations in the MD&A section of 10-K filings provides useful information to investors. Firms are predicted to enter into additional purchase obligations when they expect an increase in demand for their products. As such, growth in purchase obligations is predicted to be associated with higher future sales and earnings. The evidence is consistent with these predictions. This suggests that the disclosure of purchase obligations is useful for predicting firm performance. Further tests document a positive contemporaneous relation between stock returns and the growth in purchase obligations, consistent with the information in purchase obligations being value-relevant. However, the investor response appears to be incomplete. Results show that the change in purchase obligations is positively associated with future abnormal stock returns. Additional tests provide evidence suggesting that analyst forecasts also do not appear to fully reflect the implications of the change in purchase obligations. *I would like to thank Patricia Dechow, who provided much inspiration and encouragement through this project. I would also like to thank Richard Sloan for his guidance and insightful comments; Nicole Bastian Johnson and Ed Johnson for their guidance and extensive discussions; Sonya Seongyeon Lim, Minjung Park, Mort Pincus and Adam Szeidl for their helpful discussions and comments. This paper also has greatly benefited from the comments of workshop participants at the University of California, Berkeley. Burch Kealey and directEDGAR provided technical support in collecting purchase obligation data. Anjuli Fiedler provided editorial assistance. All remaining errors are my own.