Comparability of Street Earnings and Its Economic Consequences

Abstract

This paper examines the comparability of street earnings, which embed analysts’ non-GAAP adjustments. The comparability of street earnings has not been examined in the literature, despite that street earnings are distinctive from pro forma earnings. Using the De Franco et al.’s (2011) method, we measure the comparability of street earnings, GAAP earnings, and pro forma earnings. The results show that street earnings are significantly more comparable than GAAP earnings and pro forma earnings, supporting the benefit of non-GAAP adjustments by analysts. Moreover, we find that more comparable street earnings are more useful in predicting future earnings. In the supplementary analyses, we find that street earnings bring greater comparability improvement for firms that are larger, are followed by more analysts, are faced with more uncertainty, and experience major corporate events.

Keywords: Earnings comparability, Street earnings, Non-GAAP earnings

JEL Classification: M41