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Subject to the objectivity principle, companies cannot
recognize net increment in asset until they have been sold.
Since gain on sale of long-lived assets have been essentially
the realization of a previously unrealized capital gain, the
gain on sale of long-lived assets was different from that of
operating earnings in term of securities valuation. The purpose
of this study is to examine the association between gain on
sale of long-lived assets and stock returns. According to
earning''s persistence, this study classifies ''bottom-line''
earnings into three components: permanent earnings, transitory
earnings and gain on sale long-lived assets. This study uses
regression model with three components of earnings as
independent variable, abnormal performance index as dependent
variable to test the market reaction to components of earnings.
The results indicate the following: 1.Earnings provide useful
information to the stock market, which is consistent with prior
studies. 2.The decomposition of earnings provide additional
information than the ''bottom-line'' earnings figure. 3.Only
permanent earnings have a positive correlation with stock
returns. It implies that permanent earnings is a number of
particular interest to investors. 4.Gain on sale of long-lived
assets is uncorrelated with stock returns. In other words,
there will be no stock price reaction to gain on sale of long-
lived assets. It implies the investor can unscramble the true
cash flow implication of gain on sale of long-lived assets.
5.The ratio of gain on sale of long-lived assets to earnings is
negatively correlation with next year''s unexpected earnings.
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