Analysts' Treatment of Nonrecurring Items in Street Earnings

Abstract

Given the recent controversy over deviations of street earnings from GAAP earnings, we show that the nonrecurring items that analysts include in street earnings are more persistent and have higher valuation multiples than those items they exclude from street earnings. In addition, we find no evidence that the pricing differential between the included and excluded items leads to future abnormal returns. If, as analysts claim, the primary use of street earnings is to value a stock, then our results suggest that analysts do have expertise in processing earnings information and that certain items appear justifiably excluded.

Keywords: Street earnings, nonrecurring items, financial analyst, earnings forecast, earnings persistence, valuation multiples

JEL Classification: M41, M43, G10, G12, G14, G29