| This study provides empirical evidence that Street earnings match GAAP earnings more frequently when special items are positive than when negative. This empirical regularity remains after controlling for the magnitude of special items, firm size, and firms' propensity to exclude regular items from Street earnings. Further, when firms have negative special items, Street earnings more likely match GAAP earnings if GAAP earnings meet or beat earnings benchmarks (i.e., analysts' forecasts, prior-year earnings, and zero profit). When firms have positive special items, Street earnings more likely match GAAP earnings if earnings before special gains miss earnings benchmarks. These findings suggest managers exercise discretion over Street earnings to influence investors' perceptions. Analyses of stock market reactions around quarterly earnings announcements reveal that investors pay little attention to negative special items, whether included or excluded from Street earnings, but view positive special items like recurring earnings when Street earnings include those positive special items. These results suggest investors do not fully understand the non-recurring nature of positive special items included in Street earnings. |
