Accounting conservatism and Street earnings

Frank Heflin (), Charles Hsu () and Qinglu Jin ()
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Frank Heflin: Florida State University
Charles Hsu: Hong Kong University of Science and Technology
Qinglu Jin: Shanghai University of Finance and Economics

Review of Accounting Studies, 2015, vol. 20, issue 2, No 3, 674-709

Abstract: Abstract This paper provides evidence that conditional conservatism reduces the usefulness of GAAP earnings for valuation by investors. We find that conditional conservatism reduces GAAP earnings persistence and informativeness, makes income smoothing more difficult, and makes forecasting GAAP earnings more difficult for analysts. We also find that analysts forecast Street earnings numbers with less conditional conservatism. The decrease in conditional conservatism from adjusting GAAP earnings to Street earnings leads to improvements in persistence, smoothing, and informativeness and reduces analysts’ forecast errors and dispersion. Furthermore, as GAAP conditional conservatism increases, (1) Street earnings more likely differ from GAAP, and (2) the magnitude of the difference between Street and GAAP earnings increases. Finally, we find that exclusions (from GAAP to Street) are of higher quality for firms with higher GAAP conditional conservatism. Our results suggest that, as the conditional conservatism of GAAP earnings increases, analysts’ exclusions make Street earnings more useful to investors.

Keywords: Conservatism; Street earnings; Analyst forecasts (search for similar items in EconPapers)
JEL-codes: G12 G24 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9311-x

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