A Discussion of 'Do Managers Use Earnings Guidance to Influence Street Earnings Exclusions?'

Abstract

It is well known that both managers and analysts frequently define earnings by excluding various amounts from GAAP earnings. Christensen, Merkley, Tucker, and Venkataraman (2011) make a prediction of causality whereby managers actively influence how analysts define earnings. They argue that the mechanism through which managers accomplish this is guidance of analysts’ earnings forecasts within a fiscal period. Using a large sample of firms actively followed by analysts, the authors examine whether the existence of earnings guidance is associated with higher levels of total exclusions in analysts’ definition of earnings. The study provides suggestive evidence that managers actively influence analysts’ definition of earnings that they forecast. However, the indirect nature of the research design calls for additional work to specifically link directed guidance of GAAP earnings exclusions into amounts actually excluded by analysts.