Operating Profit Variation Analysis: Implications for Future Earnings and Equity Values

This study investigates the information content of variation analysis—that is, analysis of year-over-year changes in the components of operating profit. Using industry level data, we find that the effects on profitability of changes in the prices of output products and costs of intermediate inputs are more persistent than the effects of changes in output volume, labor cost, labor productivity, and intermediate input productivity. We further show that this information is priced by investors. One implication of these results is that the documented higher persistence of revenue shocks compared to expense shocks is likely due to price rather than volume effects.