On the Informativeness of Unexpected Exclusions from Street Earnings

60 Pages Posted: 24 Oct 2019 Last revised: 16 Apr 2020

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 30, 2020

Abstract

Most prior research examining exclusions from street earnings (i.e., the difference between actual GAAP and street earnings) does not distinguish between exclusions that were expected versus unexpected by analysts. We consider that exclusions reflect both amounts forecasted ex ante by analysts (expected exclusions) and amounts revealed after earnings were reported (unexpected exclusions). We investigate the properties of expected versus unexpected exclusions as well as analysts’ and investors’ reactions to unexpected exclusions. We find that unexpected exclusions are associated with both non-recurring and recurring earnings items and are positively associated with future earnings. The market’s response to unexpected exclusions is stronger when managers do not disclose non-GAAP earnings and analysts’ response to unexpected exclusions is stronger when earnings miss the consensus forecast. Our evidence suggests that distinguishing between expected and unexpected exclusions is useful for forecasting future earnings and valuation, and that managers’ reporting choices and earnings performance influence the market’s and analysts’ response to unexpected exclusions.

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

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 (March 30, 2020). 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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