Economic Incentives for Analysts Play Role in Determining Street Earnings

Nov 06, 2008

Even though investors use street earnings as a key valuation measure, little is known about analysts’ rationale when determining street earnings. Street earnings are an adapted version of earnings based on modifications that are decided on a firm-by-firm basis and reflect analysts’ decisions to include or exclude certain expenses. In a new study, a University of Missouri researcher found that analysts’ self-interests often influence the value of street earnings, which makes street earnings less useful for predicting future earnings of high-growth stocks.

“Decisions when calculating street earnings are quite subjective,” said David B. Farber, assistant professor of accountancy in the MU Robert J. Trulaske, Sr. College of Business. “We found that analysts’ economic incentives are associated with the adjustments made when deciding street earnings. When analysts are more optimistic toward glamour stocks, more trade and investment banking business is generated.”

Using detailed data on analysts’ inclusion and exclusion decisions on nonrecurring expense items, Farber found that street earnings for glamour stocks (stocks that appear to have high-growth potential) were more upwardly biased than street earnings for values stocks (stocks that tend to trade at a low price relative to their fundamentals). Expenses for glamour stocks that should be included in street earnings were, instead, excluded.

“Analysts are more likely to exclude expense items when determining street earnings for glamour stocks than for value stocks,” Farber said. “Although we argue that analysts have an economic incentive to be biased toward street earnings of glamour stocks, we cannot establish whether the observed bias is intentional. Also, several agents play roles in the determination of street earnings, so we cannot attribute all of the bias to analysts.”

The study, “Analysts’ Incentives and Street Earnings,” has been accepted for publication in the Journal of Accounting Research and is co-authored by Bok Baik of Seoul National University and Kathy Petroni of Michigan State University.

Provided by University of Missouri

Explore further: Schwarzenegger pushes Congress to save after-school funding

add to favorites email to friend print save as pdf

Related Stories

FireEye is "first in the door" on big cyberattacks

Feb 12, 2015

As hackers invade the computer systems of major companies with greater frequency and their corporate victims scramble to contain the damage and prevent future intrusions, these are boom times for cybersecurity ...

Shares of cybersecurity firm FireEye up on 4Q beat (Update)

Feb 11, 2015

FireEye Inc., the high-profile computer security company called in to investigate massive hacks at Sony Pictures and Anthem, reported fourth-quarter earnings Wednesday that show its business is growing but profit so far remains ...

Recommended for you

Destroyed Mosul artefacts to be rebuilt in 3D

Mar 27, 2015

It didn't take long for the scientific community to react. Two weeks after the sacking of the 300 year-old Mosul Museum by a group of ISIS extremists went viral on Youtube, researchers from the ITN-DCH, IAPP ...

Boys plagiarise more than girls at school

Mar 27, 2015

Research by the University of the Balearic Islands has analysed the phenomenon of academic plagiarism among secondary school students. The study, published in the journal Comunicar, confirms that this practi ...

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.