The Risk-Relevance of Street Earnings
49 Pages Posted: 14 Aug 2018 Last revised: 28 Aug 2018
Date Written: July 26, 2018
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: Suggested Citation