Please join me in congratulating Stephannie Larocque, whose paper, “Filling in the GAAPs in Individual Analysts’ Street Earnings Forecasts,” with Brian Bratten and Teri Yohn, has been accepted for publication in Management Science. Here is the abstract:
Analysts’ street earnings forecasts are commonly used to evaluate firm performance and estimate firm value. These forecasts are sometimes based on GAAP earnings and sometimes based on non-GAAP earnings, which exclude various GAAP earnings components. Therefore, differences in analysts’ street earnings forecasts may capture not only differences in expected performance but also differences in the earnings metric forecasted. We find that differences across analysts in the earnings metric forecasted are pervasive and consequential. We hypothesize and find that analysts who forecast non-GAAP street earnings, rather than GAAP street earnings, issue relatively more accurate GAAP and street forecasts and their relative accuracy increases as the percentage of analysts forecasting non-GAAP street earnings increases, consistent with differences across analysts in the earnings metric forecasted capturing the difficulty in forecasting earnings.
We also hypothesize that because GAAP are generally conservative and differences across analysts in the earnings metric forecasted may capture transitory losses, these differences are likely associated with a lower GAAP earnings surprise. Consistent with this prediction, we find that variation across analysts in the earnings metric forecasted is associated with a lower earnings surprise and lower stock returns around the earnings announcement, incremental to the dispersion in street forecasts. Overall, we show that ex ante differences across analysts in the earnings metric forecasted are informative about analysts’ forecast accuracy, the ex post earnings surprise, and stock returns around the earnings announcement.