The Market Pricing of Special Items that are Included Versus Excluded From 'Street' Earnings

49 Pages Posted: 12 Oct 2010

See all articles by Charles Hsu

Charles Hsu

Hong Kong University of Science & Technology

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting

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Date Written: July 20, 2010

Abstract

We re-investigate the market pricing of special items, with particular emphasis on how managers “frame” them via their inclusion or exclusion from “street” earnings. When managers include the special items in “street” earnings (i.e., “street” = GAAP), the market overprices them, believing the special items to be more persistent than they actually are. As a result, there is a negative relationship between the special items and future stock returns in the following year. However, when managers exclude special items from “street” earnings (i.e., “street” ≠ GAAP), the market recognizes their transitory characteristic and the relationship between special items and returns is insignificant in the following year. We also demonstrate that the decision to include (exclude) special items with (from) “street” earnings is associated with whether inclusion or exclusion of special items a) increases earnings numbers, b) smoothes the earnings series, or c) helps managers to meet earnings benchmarks.

Keywords: Special Items, Mispricing, Street Earnings, Management Framing

JEL Classification: G14, M41

Suggested Citation

Hsu, Charles and Kross, William, The Market Pricing of Special Items that are Included Versus Excluded From 'Street' Earnings (July 20, 2010). Available at SSRN: https://ssrn.com/abstract=1678266 or http://dx.doi.org/10.2139/ssrn.1678266

Charles Hsu

Hong Kong University of Science & Technology ( email )

Hong Kong
Hong Kong
852-2358-7568 (Phone)
852-2358-1693 (Fax)

William Kross (Contact Author)

State University of New York (SUNY) at Buffalo - Department of Accounting ( email )

Buffalo, NY 14260
United States

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