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GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings

GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings Managers, security analysts, investors, and the press rely increasingly on modified definitions of GAAP net income, known by such names as “operating” and “pro forma” earnings. We document this phenomenon and discuss competing explanations for the recent rise in the use of such modified earnings numbers and implications for the interpretation of related accounting research. Our results show that over the past 20 years there has been a dramatic increase in the frequency and magnitude of cases where “GAAP” and “Street” earnings differ. Further, there is a very strong bias toward the reporting of a Street earnings number that exceeds the GAAP earnings number. We also show that the market response to the Street earnings number has displaced GAAP earnings as a primary determinant of stock prices. Finally, through an analysis of earnings releases, we show that management has taken a proactive role in defining and emphasizing the Street number when communicating to analysts and investors. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings

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Publisher
Wiley
Copyright
University of Chicago on behalf of the Institute of Professional Accounting, 2002
ISSN
0021-8456
eISSN
1475-679X
DOI
10.1111/1475-679X.00038
Publisher site
See Article on Publisher Site

Abstract

Managers, security analysts, investors, and the press rely increasingly on modified definitions of GAAP net income, known by such names as “operating” and “pro forma” earnings. We document this phenomenon and discuss competing explanations for the recent rise in the use of such modified earnings numbers and implications for the interpretation of related accounting research. Our results show that over the past 20 years there has been a dramatic increase in the frequency and magnitude of cases where “GAAP” and “Street” earnings differ. Further, there is a very strong bias toward the reporting of a Street earnings number that exceeds the GAAP earnings number. We also show that the market response to the Street earnings number has displaced GAAP earnings as a primary determinant of stock prices. Finally, through an analysis of earnings releases, we show that management has taken a proactive role in defining and emphasizing the Street number when communicating to analysts and investors.

Journal

Journal of Accounting ResearchWiley

Published: Mar 1, 2002

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