Information Content of the Non-Operating Component of Earnings in Forecasting of Earnings and Equity Valuation

This study provides evidence for different characteristics of the non-operating component of earnings. We base our analysis on the valuation framework in Ohlson (1999). First, using a sample of firms listed on Tehran Stock Exchange (TSE) between 1998 and 2007 with available annual data, we implement the Ohlson (1999) model by estimating four equations of this model as a system, using seemingly unrelated regressions (SUR) method. Then, Based on these estimating equations, we address and test Five hypotheses relating to characteristics of the non-operating component of earnings.The Findings show that the non-operating component of earnings is incrementally informative in predicting future abnormal earnings and in explaining current equity market values. In addition, the results show that the non-operating component of earnings is forecasting relevant, value relevant, and Predictable. Finally, we find that, as predicted by Ohlson (1999), there is a link between “forcasting relevancy” and “valuation relevancy” characteristics of non-operating component of earnings.