Filling in the GAAPs in Individual Analysts’ Street Earnings Forecasts

55 Pages Posted: 27 Nov 2017 Last revised: 17 Mar 2022

See all articles by Brian Bratten

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: March 2022

Abstract

Analysts’ street earnings forecasts are sometimes based on GAAP earnings and sometimes based on non-GAAP earnings, which exclude various GAAP earnings components. Therefore, differences in analysts’ street earnings forecasts may capture differences in not only expected performance but also the earnings metric forecasted. We argue that analysts who forecast non-GAAP, rather than GAAP, street earnings are more likely to separately analyze earnings components. Consistent with this argument, we find that analysts who forecast non-GAAP street earnings issue relatively more accurate forecasts. We also argue that excluded earnings components often reflect negative transitory items, and that variation across analysts in the earnings metric forecasted suggests that the negative excluded items are forecasted by only a subset of analysts. Consistent with this assertion, we find that variation across analysts in the earnings metric forecasted is associated with a lower consensus GAAP earnings surprise and lower stock returns around the earnings announcement. Finally, although variation in the earnings metric forecasted is a source of analyst forecast dispersion, we find that it is also incrementally associated with a lower earnings response coefficient, consistent with the existence of transitory items. We therefore find that the variation in the earnings metric forecasted is an important source of analyst forecast dispersion that predicts not only a lower earnings surprise but also a lower earnings response.

Keywords: Analysts, Forecasts, Street vs. GAAP, Exclusions

JEL Classification: M4, M41

Suggested Citation

Bratten, Brian and Larocque, Stephannie A. and Yohn, Teri Lombardi, Filling in the GAAPs in Individual Analysts’ Street Earnings Forecasts (March 2022). Available at SSRN: https://ssrn.com/abstract=3074701 or http://dx.doi.org/10.2139/ssrn.3074701

Brian Bratten (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
859-257-1947 (Phone)

HOME PAGE: http://gatton.uky.edu/faculty-research/departments/von-allmen-school-accountancy/directory

Stephannie A. Larocque

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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