Filling in the GAAPs in Individual Analystss Street Earnings Forecasts

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 capture not only differences in expected performance but also differences in the underlying performance metric being forecasted. We find that differences across analysts in whether the analyst’s street earnings forecast for a firm-quarter is based on GAAP versus non-GAAP earnings are pervasive and consequential. While we observe that analysts who forecast non-GAAP street earnings issue relatively more accurate GAAP forecasts, these analysts’ street forecasts only appear more accurate when the majority of analysts also forecast non-GAAP street earnings for the same firm-quarter. These findings suggest that differences in the earnings metric forecasted can lead to misleading inferences about analysts' forecast accuracy. We also find that variation across analysts in whether the analyst forecasts GAAP versus non-GAAP street earnings is associated with a muted market reaction to earnings announcements. Importantly, the variation in the underlying metric being forecasted provides incremental information over the dispersion of analysts’ street forecasts for explaining the market reaction to earnings. Overall, we provide a novel method to capture differences in the earnings metric forecasted by analysts and show the implications of these differences for analysts’ forecast accuracy and stock returns.