Journal of Accounting Research
Vol. 40 No. 1 March 2002
Printed in U.S.A.
GAAP versus The Street: An
Empirical Assessment of Two
MARK T. BRADSHAW
AND RICHARD G. SLOAN†
Received 31 December 1999; accepted 8 October 2001
Managers, security analysts, investors, and the press rely increasingly on
modiﬁed deﬁnitions of GAAP net income, known by such names as “operat-
ing” and “pro forma” earnings. We document this phenomenon and discuss
competing explanations for the recent rise in the use of such modiﬁed earn-
ings 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.
Harvard Business School; † University of Michigan. We acknowledge the helpful com-
ments of Mark Bagnoli, Ramji Balakrishnan, Larry Brown, Ilia Dichev, Bruce Johnson, Richard
Leftwich (the Editor), Sonja Olhoft, Scott Richardson, Rick Tubbs, an anonymous reviewer,
and seminar participants at the University of Iowa. We also thank I/B/E/S International Inc.
for providing data on analyst earnings estimates and other information.
, University of Chicago on behalf of the Institute of Professional Accounting, 2002