Do Analyst Adjustments Affect Earnings Comparability?

• In Event: Earnings Comparability

Abstract

We examine whether analyst-adjusted earnings metrics (or “Street earnings”) provide greater comparability with peer firms than earnings prepared in accordance with generally accepted accounting principles (GAAP). While a uniform set of accounting standards may provide a platform for higher earnings comparability under GAAP, the ability of analysts to adjust earnings for idiosyncratic accounting information may improve comparability across firms. Using two alternative comparability measures, we find that analyst adjustments improve earnings comparability, on average. We also find that the increased comparability of Street (or analyst-adjusted) earnings significantly improves current and future analyst forecasts errors, reduces serial correlation of forecast errors, and improves value relevance, even after controlling for GAAP earnings comparability. Importantly, we also document that the benefits associated with increased Street earnings comparability extend to within-industry firms with GAAP earnings that are not adjusted by analysts, suggesting that analyst activity creates positive externalities for peer firms. Our findings shed new light on the usefulness of Street earnings, the economic benefits associated with financial reporting comparability, and the role of analysts in facilitating information transfer.

Authors

• Hakyin Lee, Hofstra University

• Carol Marquardt, Baruch College, City University of New York

• Jangwon Suh, New York Institute of Technology