Analysts' Incentives and Street Earnings

39 Pages Posted: 18 Sep 2006 Last revised: 30 Dec 2008

See all articles by Bok Baik

Bok Baik

Seoul National University

David B. Farber

Indiana University Kelley School of Business Indianapolis

Kathy R. Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management

Abstract

We examine whether analysts' incentives influence street earnings. Because Jegadeesh et al. (2004) argue and demonstrate that analysts' incentives to promote stocks increase in the extent to which the stock exhibits glamour characteristics, we predict that analysts more likely make income-increasing adjustments for potentially transitory (i.e., nonrecurring) items in determining street earnings for glamour stocks than for value stocks. We find that analysts more likely exclude expense items from street earnings for glamour stocks than for value stocks and that excluded expense items help predict future earnings for glamour stocks but not for value stocks. We also report that analysts' adjustments cause street earnings of glamour stocks to meet or beat analysts' earnings forecasts more so than street earnings of value stocks. Results suggest that analysts' self-interest influences street earnings and this self-interest leads to street earnings that are less useful in predicting future earnings for glamour stocks.

Keywords: Analyst incentives, street earnings, valuation

JEL Classification: M41, M43, G29

Suggested Citation

Baik, Bok and Farber, David B. and Petroni, Kathy Ruby, Analysts' Incentives and Street Earnings. Journal of Accounting Research, March 2009, AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Papers, Available at SSRN: https://ssrn.com/abstract=930674

Bok Baik

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

David B. Farber

Indiana University Kelley School of Business Indianapolis ( email )

801 W Michigan Ave
Indianapolis, IN 46202
United States

Kathy Ruby Petroni (Contact Author)

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2924 (Phone)
517-432-1101 (Fax)

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