The information content of discontinued operations associated with APB Opinion No. 30

Chung Eul Yoo, Purdue University

Abstract

The study examines the information content of one of the special items, discontinued operations. APB Opinion No. 30 requires that the results of operating a business segment that has been or is expected to be discontinued be reported as a separate component of income, after income from continuing operations but before extraordinary items. The separate disclosure requirement appears to be based on the belief that discontinued operations provide different information from ordinary income numbers. Thus, this study attempts to provide empirical evidence on the information content of discontinued operations by examining the characteristics of changes in both systematic risk and unsystematic risk. More specifically, the study hypothesizes that discontinuance of a segment may affect the systematic risk of a firm because of changes in a firm's production and/or investment structure caused by discontinued operations. This study also evaluates the incremental information content of discontinued operations by examining the association between abnormal returns (unsystematic risk) and discontinued operations. The empirical results of the study show that the treatment sample consisting of firms announcing discontinued operations contains not only the greater number of observations having significant beta changes, but also experiences the greater magnitude of beta changes than the control sample. The study also suggests that DO provides significant incremental information content beyond unexpected earnings with firm size controlled. The coefficients of discontinued operations and unexpected earnings in multiple regressions have opposite signs, implying that the capital market evaluates discontinued operations differently from ordinary earnings. Since the inclusion of discontinued operations in ordinary earnings reduces nontrivially the information content conveyed by accounting reports, separate disclosure of discontinued operations may be beneficial.

Degree

Ph.D.

Advisors

Eskew, Purdue University.

Subject Area

Accounting

COinS