Do managers use earnings guidance to influence street earnings exclusions?

Theodore E. Christensen (), Kenneth J. Merkley (), Jennifer Wu Tucker () and Shankar Venkataraman ()
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Theodore E. Christensen: Brigham Young University
Kenneth J. Merkley: Cornell University
Jennifer Wu Tucker: University of Florida
Shankar Venkataraman: Georgia Institute of Technology

Review of Accounting Studies, 2011, vol. 16, issue 3, No 6, 527 pages

Abstract: Abstract Despite the apparent importance of “street earnings” to investors, we know relatively little about the process through which this earnings metric is determined. The limited evidence in the extant literature provides analyst-centric explanations, suggesting that analysts’ abilities and incentives influence which line items forecast-tracking services exclude from GAAP earnings to arrive at street earnings. We propose an alternative explanation: managers actively influence analysts’ forecast exclusion decisions via earnings guidance. We test this explanation by examining how earnings guidance influences two aspects of analysts’ exclusions: (1) special item exclusions (i.e., nonrecurring items) and (2) incremental exclusions (i.e., recurring items). We find that for firms with no special items in the previous year, when managers guide, analysts exclude almost all current-year special items, whereas when managers do not guide, the proportion that analysts exclude is significantly lower. More importantly, we that analysts’ incremental exclusions are significantly higher when managers guide than when they do not guide. Overall, our evidence suggests that managers play an active role in influencing the composition of street earnings via earnings guidance.

Keywords: Street earnings; Earnings guidance; Special items; Pro forma guidance (search for similar items in EconPapers)
JEL-codes: M40 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9158-3

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