Extraordinary items: Accounting and market risk

Abstract

The market reaction to the recurrent reporting of extraordinary items was tested by calculating and comparing the betas for a portfolio of shares that reported extraordinary items in each of the five years 1990 through 1994 and a control portfolio that reported no extraordinary items over the same period. There was evidence of a loose interpretation of the accounting standard and of income smoothing in the ‘extraordinary items portfolio’ which had almost double the systematic risk, as measured by the beta coefficient of the two portfolios. Extraordinary items were found to be significant predictors of market betas in a multivariate analysis.