Analysts' Incentives and Street Earnings

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