Do Big Write-Offs Inflate Earnings?
interactive.wsj.com
This is dumbest egghead study I've ever heard of.
"Accounting is conservative by nature, but it's gotten more conservative," says Carla Hayn, a professor of accounting at the University of California at Los Angeles. "So, earnings today don't mean the same thing that earnings did yesterday. Companies are taking greater losses, being more conservative and taking writedowns. If we back those "discretionary accruals" out, the high price-to-earnings, and market-to-book multiples are not as high -- but they're still high."
...
They also found that companies have over time taken ever larger write-offs and taken them sooner, something that has substantially depressed book value. For example, for their sample they found that between 1973 and 1996, the average ratio of a company's stock price to its book value per share doubled to 3.4 from 1.7, consistent with the widespread view that stocks are at record valuations.
But when the academics added back to book value all the "discretionary accruals," primarily write-offs, that the companies took over that time, the ratio began and ended the period unchanged at 1.6, well below its level typical of the 1960s.
Ah I see! In the old days, the amount of money I made in the last 5 minutes was $0.00. Nowadays, though, I can say I made a million bucks, but had to write it off. Now these brainiacs tell me that since the write-off was a "discretionary accrual," I really did make a million bucks after all.
Does having a PhD in accounting make you any smarter? Apparently not. |
