On the Informativeness of Unexpected Exclusions from Street Earnings

Abstract

Non-GAAP exclusions from street earnings can include both expected exclusions, forecasted ex ante by analysts, and unexpected exclusions, revealed after earnings are reported. We find that unexpected exclusions are associated with future earnings, even when exclusions were not forecasted. Surprisingly, we find that firms are more likely to meet or beat street (but miss GAAP) forecasts when analysts forecasted exclusions than when they did not forecast exclusions. Regardless of whether analysts forecasted exclusions, unexpected exclusions used to meet or beat street forecasts are associated with future earnings. We observe that analysts and investors react to unexpected exclusions, but place little weight on unexpected exclusions when earnings meet or beat street but miss GAAP forecasts. Our study provides insight into unexpected earnings including their association with future earnings, their role in benchmark-beating, and analyst and investor reactions and suggests unexpected exclusions used for benchmark-beating are not primarily attributable to transitory items.