Evidence of an increasing trend in earnings surprises over the past two decades: The role of positive manager‐initiated non‐GAAP adjustments

Abstract

AbstractWe explore patterns of street earnings surprises over time. We find a steady increasing trend in positive street earnings surprises over the past two decades. This trend reflects an asymmetric shift to the right—from substantially fewer small earnings surprises around zero to many more and larger ones well above zero. A difference‐in‐differences analysis reveals that this pattern cannot be explained by a similar pattern in the distribution of generally accepted accounting principles (GAAP) earnings surprises. The increasing trend is also steeper for firms with earnings guidance. We suggest that the shift in the pattern of street earnings surprises over time is best attributed to analysts’ increasing inclusion of positive manager‐initiated and other similar non‐GAAP adjustments in street earnings per share. This behavior has produced an ever‐increasing stream of positive street earnings surprises.