On the Informativeness of Unexpected Exclusions from Street Earnings

52 Pages Posted: 24 Oct 2019 Last revised: 27 Nov 2023

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: November 21, 2023

Abstract

Exclusions from street earnings can include both expected exclusions, forecasted ex-ante by analysts, and unexpected exclusions, revealed after earnings are reported. While prior research largely examines total exclusions from street earnings, unexpected exclusions reflect the news or surprise in exclusions. We investigate the properties and informativeness of unexpected exclusions for future profitability, benchmark beating, analyst forecast errors, and future stock returns. We find that unexpected exclusions represent a mix of transitory and recurring items and are informative about future street earnings. In an analysis of hand-collected analysts’ reports, we find that unexpected exclusions are more likely to reflect misestimated recurring items when analysts forecasted exclusions and unexpected transitory items when analysts did not forecast exclusions. We also examine benchmark beating behavior, in which street earnings meet street forecasts but GAAP earnings miss GAAP forecasts. We observe that benchmark beating is more likely to occur when analysts forecast exclusions than when they do not. Moreover, we find unexpected exclusions are more persistent when street earnings meet street forecasts but GAAP earnings miss GAAP forecasts. These findings are consistent with recurring earnings amounts being opportunistically shifted to excluded items to meet analysts’ street forecasts. Finally, we find some evidence that analysts and investors react to, but do not fully incorporate, the information in unexpected exclusions, based on forecast revisions and stock price reactions.

Keywords: analysts, forecasts, street vs. GAAP, exclusions, meet or beat, benchmark beating

JEL Classification: M4, M41

Suggested Citation

Bratten, Brian and Larocque, Stephannie A. and Yohn, Teri Lombardi, On the Informativeness of Unexpected Exclusions from Street Earnings (November 21, 2023). Available at SSRN: https://ssrn.com/abstract=3470390 or http://dx.doi.org/10.2139/ssrn.3470390

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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