The Risk-Relevance of Street Earnings

49 Pages Posted: 14 Aug 2018 Last revised: 28 Aug 2018

See all articles by Frank Heflin

Frank Heflin

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

Kalin S. Kolev

City University of New York - Stan Ross Department of Accountancy

Benjamin C. Whipple

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

Date Written: July 26, 2018

Abstract

We provide the first evidence on the risk-relevance of Street earnings. We find that the earnings components analysts include in Street earnings are of higher equity risk-relevance than the components they exclude from Street earnings. Thus, Street earnings focus on the more equity risk-relevant components of GAAP earnings. We also find, however, that exclusions contain some risk-relevant information. In particular, other item exclusions are at least as equity risk-relevant as special item exclusions before Reg G, while special item exclusions are more equity risk-relevant after the regulation. Thus, there was a change in the comparative risk-relevance of exclusions after Reg G. Finally, we examine the credit risk-relevance of Street earnings and find that exclusions are as credit risk-relevant as Street earnings. These results indicate that (1) Street earnings do not offer an informational improvement over GAAP earnings for assessing a firm’s credit risk and (2) the informational needs of creditors differ from those of equity investors.

Keywords: Non-GAAP Earnings, Street Earnings, Street Exclusions, Special Items, Other Exclusions, Equity Risk, Credit Risk, Regulation G

JEL Classification: D82, M41

Suggested Citation

Heflin, Frank and Kolev, Kalin S. and Whipple, Benjamin C., The Risk-Relevance of Street Earnings (July 26, 2018). Baruch College Zicklin School of Business Research Paper No. 2018-08-01. Available at SSRN: https://ssrn.com/abstract=3222893 or http://dx.doi.org/10.2139/ssrn.3222893

Frank Heflin

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

Athens, GA 30602
United States
706-542-1616 (Phone)
706-542-3630 (Fax)

Kalin S. Kolev (Contact Author)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
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

Register to save articles to
your library

Register

Paper statistics

Downloads
89
rank
279,602
Abstract Views
366
PlumX Metrics