Do analysts and investors fully understand the persistence of the items excluded from Street earnings?

Previous research has found that the items that are included in GAAP earnings but excluded from Street earnings to allow the firm to meet or beat analyst earnings forecasts (“MBF exclusions”) are more persistent than the other excluded items. In this study, I find that the difference in the levels of persistence between MBF and non-MBF exclusions declined after the introduction of Regulation G, which requires public companies that disclose non-GAAP earnings to also present GAAP earnings and a reconciliation of the two. Analysts underestimate the persistence of non-MBF exclusions, but the degree of this underestimation is lower in the post-regulation period. In contrast, there is little evidence to indicate that analysts underestimate the persistence of MBF exclusions in either time period. I also find strong (weak) evidence that investors underestimate the persistence of Street exclusions in the pre- (post-) regulation period. These results suggest that Regulation G constrains the practice of excluding recurring expenses from Street earnings to meet or beat analyst forecasts and helps analysts and investors to understand the persistence of Street exclusions.     

Additional Evidence on the Association Between Director Stock Ownership and Incentive Compensation

Governance scholars argue that outside directors have little incentive to monitor managers when their equity stake in the firm is not significant. A sample with a substantial level of outside director shareholdings is examined and a negative relationship between incentive compensation and outside director stock ownership is found. While firms pay higher incentive compensation when they have greater investment opportunities, the compensation contains excess pay due to ineffective corporate governance. Overall, the results suggest more effective corporate governance and lower incentive compensation when outside director stock ownership is higher.     

Imposing Regularity Conditions to Measure Banks’ Productivity Changes in Taiwan Using a Stochastic Approach

Asia-Pacific Financial Markets - This paper develops a stochastic approach to impose regularity properties on a directional output distance function (DODF) and an output distance function, which...     

What happens to Japan if China catches a cold?: A causal analysis of Chinese growth and Japanese growth

In this paper, we conduct an empirical study to investigate the directionality of the dependence between the Chinese economy and the Japanese economy. Taking a probabilistic causal approach, we infer the causal dependence among the Japanese economy and the Chinese economy based on observed data. We find evidence that the Chinese growth has both contemporaneous and temporal causal effects on Japanese growth, though the effect is very small. We did not find any evidence that the Japanese growth might have temporal or contemporaneous causal effect on Chinese growth.