GAAP versus Street Earnings: Making Earnings Look Higher and Smoother

Abstract

Street earnings are compared to GAAP earnings for over 29,000 annual observations and 100,000 quarterly observations from 1990 to 2000. Analysis is performed after separating firms by profitability and earnings volatility. Although there is little difference between the two types of earnings for firms with GAAP profits, firms with GAAP losses report significantly higher Street earnings. Firms with annual GAAP losses are also about 20 times more likely to report annual Street profits than firms with annual GAAP profits are likely to report annual Street losses. Additionally, firms with volatile GAAP earnings tend to report higher, smoother Street earnings. The results suggest that some managers attempt to make financial performance look healthier.