Another Look at Gaap Versus the Street: An Empirical Assessment of Measurement Error Bias

Abstract

Bradshaw and Sloan (2002) document a significant increase in the difference between the earnings response coefficients (ERCs) for GAAP and Street (I/B/E/S) earnings over the 1990s, suggesting that the market has become increasingly reliant or fixated on Street earnings. In this study we investigate whether, alternatively, an errors in variables problem caused by a mismatch between the definitions of realized and expected earnings drives the ERC divergence. Our findings suggest that results from conventional analyses of GAAP and Street ERCs, including the ERC divergence pattern, are significantly contaminated by measurement errors in earnings surprises.

Keywords: capital markets, analyst forecasts, earnings response coefficients, GAAP earnings, Street earnings, measurement error