Do analysts and investors fully understand the persistence of the items excluded from Street earnings? |
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Authors: | Chih-Ying Chen |
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Institution: | (1) School of Accountancy, Singapore Management University, 60 Stamford Road, Singapore, 178900, Singapore |
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Abstract: | 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. |
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Keywords: | |
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