Analysts’ GAAP Earnings Forecasts and Their Implications for Accounting Research

52 Pages Posted: 25 May 2014 Last revised: 18 Jan 2018

See all articles by Mark T Bradshaw

Mark T Bradshaw

Boston College

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Kurt H. Gee

Penn State; Financial Accounting Standards Board (FASB)

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: December 1, 2017

Abstract

We examine analysts’ GAAP earnings forecasts and illustrate their usefulness in two prominent research settings. First, we find that the availability of GAAP forecasts has increased dramatically since 2003, and they are now available for most I/B/E/S-covered firms. Next, we utilize GAAP forecasts to solve important measurement error problems in prior research that attempts to examine GAAP forecast errors without an explicit GAAP forecast. We begin with research exploring investors’ preferences for GAAP versus non-GAAP earnings. We find that traditionally-identified GAAP forecast errors are subject to 37% measurement error. Nevertheless, in contrast to the pervasive caveats in the non-GAAP literature, evidence of an investor preference for non-GAAP earnings relative to GAAP earnings is robust after correcting for this measurement error. Second, we revisit the literature identifying firms that use non-GAAP exclusions to meet or beat analysts’ forecasts when GAAP earnings fall short of expectations. We find that 34% of the traditionally-identified meet-or-beat firms are misidentified due to measurement error and this misidentification masks the inference that firms more frequently exclude transitory expenses rather than recurring expenses for meet-or-beat purposes.

Keywords: Measurement error; Earnings expectations; Analysts’ forecasts; GAAP forecasts; Non-GAAP earnings; Street earnings; Earnings surprise; Meet-or-beat

JEL Classification: G14; M40; M41

Suggested Citation

Bradshaw, Mark T and Christensen, Theodore E. and Gee, Kurt H. and Whipple, Benjamin C., Analysts’ GAAP Earnings Forecasts and Their Implications for Accounting Research (December 1, 2017). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2441367 or http://dx.doi.org/10.2139/ssrn.2441367

Mark T Bradshaw (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Kurt H. Gee

Penn State ( email )

201 Old Main
University Park
State College, PA 16802
United States

Financial Accounting Standards Board (FASB) ( email )

401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
United States

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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