Corporate Finance

A Bias For Charges

Restructuring charges are the rage. But they can come back to haunt you.
George DonnellyJanuary 1, 2000

Restructuring charges are the rage. But they can come back to haunt you. According to a study by Vanderbilt University researchers, analysts are generally pessimistic, but not pessimistic enough, about future earnings after restructuring charges are announced. Restructurings, then, may provide the fodder for unpleasant earnings surprises.

“We found on average that accuracy declines subsequent to the one-year-ahead forecast, and [optimistic] bias increases,” says Debra Jeter, an accounting professor at Vanderbilt’s Owen Graduate School of Management. Jeter, along with Vanderbilt MBA professors Paul K. Chaney and Chris E. Hogan, studied the impact of about 150 restructurings from 1987 to 1992.

“Analysts are revising downward, but they’re still overestimating profits to a great extent.” The study suggests that charges create an accuracy gap, in part because restructuring firms generally face greater business uncertainty.

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One potential remedy to analyst confusion is extremely detailed disclosure to help guide analysts, says Jeter. That notion was recently reinforced by a new Staff Accounting Bulletin from the SEC.

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