Purchase Obligations, Earnings Persistence and Stock Returns

This paper examines whether the disclosure of purchase obligations in the MD&A section of 10-K filings provides useful information to investors. Firms are predicted to enter into additional purchase obligations when they expect an increase in demand for their products. As such, growth in purchase obligations is predicted to be associated with higher future sales and earnings. The evidence is consistent with these predictions. This suggests that the disclosure of purchase obligations is useful for predicting firm performance. Further tests document a positive contemporaneous relation between stock returns and the growth in purchase obligations, consistent with the information in purchase obligations being value-relevant. However, the investor response appears to be incomplete. Results show that the change in purchase obligations is positively associated with future abnormal stock returns. Additional tests provide evidence suggesting that analyst forecasts also do not appear to fully reflect the implications of the change in purchase obligations.