Gaap Versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings
43 Pages Posted: 25 Aug 2000
Date Written: June 2000
Security analysts, investors and the press are increasingly relying on modified definitions of GAAP net income, known by such names as 'operating EPS' and 'pro forma EPS.' These new 'Street' definitions of EPS exclude items such as 'non-recurring' and 'non-cash' charges. Moreover, this move to Street definitions of EPS has been accompanied by a dramatic increase in the proportion of corporate expenses that are classified as excluded items. The outcome has been a large and growing gap between the GAAP EPS that is reported in firms' financial statements and the Street EPS that is tracked by analysts and priced by investors. This increasing use of 'Street' definitions of earnings represents a subtle form of earnings management and has important implications for both academics and practitioners.
Keywords: Earnings, analyst forecasts, earnings management, managerial discretion
JEL Classification: M4, G1, G2
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