Gaap Versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings

Posted: 20 Aug 2002 Last revised: 15 Jul 2010

See all articles by Mark T Bradshaw

Mark T Bradshaw

Boston College

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2010

Abstract

Managers, security analysts, investors, and the press rely increasingly on modified definitions of GAAP net income, known by such names as 'operating' and 'pro forma' earnings. We document this phenomenon and discuss competing explanations for the recent rise in the use of such modified earnings numbers and implications for the interpretation of related accounting research. Our results show that over the past 20 years there has been a dramatic increase in the frequency and magnitude of cases where 'GAAP' and 'Street' earnings differ. Further, there is a very strong bias toward the reporting of a Street earnings number that exceeds the GAAP earnings number. We also show that the market response to the Street earnings number has displaced GAAP earnings as a primary determinant of stock prices. Finally, through an analysis of earnings releases, we show that management has taken a proactive role in defining and emphasizing the Street number when communicating to analysts and investors.

JEL Classification: M41, G29, G12

Suggested Citation

Bradshaw, Mark T and Sloan, Richard G., Gaap Versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings (July 15, 2010). Journal of Accounting Research, Vol. 40, No. 1, March 2002. Available at SSRN: https://ssrn.com/abstract=315047

Mark T Bradshaw (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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