Why are Lower Persistence Factors related to High ROE?

And why are there significant levels of nonrecurring items with lower persistence factors? (I assume it has something to do with the fact that non-recurring items are left off when computing residual income). This is what it says in Schweser, but gives no explanation. (Page 305, Book 4). -Richard

*bump* - hope somebody can comment on this! Exact text from schweser (Pg 305) “Low Persistent factors will be associated with the following 1. High ROE 2. Significant Levels of nonrecurring items 3. High accounting accruals” I don’t understand why so??

I’m guessing that the Low Persistence in earnings is partially due to earnings quality. for 1) high roe is not sustainable indefinitely and a reversion to the mean return will hinder persistence in current earning levels 2) non recurring items are not attributed to operating earnings, therefore are not persistent, beware on companies that have non-recurring items yoy (i.e. Motorola circa 2000-2006) and 3) likewise high accrual rates are not persistent in the long run because eventually accrual earnings will have to equal cash earnings.

Thanks Char-Lee. Makes sense now.