We investigate whether the special item anomaly in the U.S. exists in an 
environment where the separation of non-recurring items from earnings is 
mandated. We use South African data, as the separate disclosure of specific non-recurring 
items has been mandatory since 2000. Our results show that, other than the cash 
flow component of earnings, none of the other earnings components reflects 
significant mispricing. When additional explanatory variables are included in 
the analyses, the mispricing of the cash flow component disappears. This 
evidence suggests that when the disclosure of non-recurring items is mandated, 
investors are able to price earnings components in a manner that is consistent 
with the actual levels of persistence of these components

1. Introduction
In this study, we focus on a setting where the disclosure of certain non-recurring items is
mandatory rather than voluntary. Although research shows that the non-recurring items that
are disaggregated from earnings on a voluntary basis are mispriced (Atwood & Xie, 2010;
Dechow & Ge, 2006; Doyle, Lundholm & Soliman, 2003), it remains an open question
whether non-recurring items are mispriced when regulatory bodies make it mandatory for a
specified set of these items to be disaggregated fromearnings. This is largely because the U.S.
and other large industrial nations do not require such information.
Dichev and Tang (2008, p. 1455) posit that the proliferation of pro forma earnings and the
separate disclosure of special items in the U.S. can be regarded as a “somewhat instinctive and
disorderly attempt to provide the important distinction between persistent and recurring
components of earnings from sporadic and non-recurring components.” While U.S. GAAP
requires separate disclosure of discontinued operations (SFAS 144) and extraordinary items
(APB No. 30),1 there is no requirement in U.S. GAAP to separate non-recurring items from
GAAP earnings and “non-recurring” is not defined in the standards.2 In addition, there are no
stock exchange regulations in the U.S. that govern the identification and calculation of
non-recurring items.3 Hence, U.S. firms have considerable latitude with regard to the items
they choose to exclude from GAAP earnings. Prior literature shows that managers use their
discretion with regard to the exclusion of non-recurring items opportunistically (Bhattacharya,
Black, Christensen, & Mergenthaler, 2004; Doyle, Lundholm, & Soliman, 2003; Landsman,
Miller, & Yeh, 2007; McVay, 2006).
Our study addresses the special item anomaly. Special items, mainly accruals that are
supposed to be.