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Another look at GAAP versus the Street: an empirical assessment of measurement error bias

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  • Daniel A. Cohen

    (New York University)

  • Rebecca N. Hann

    (University of Southern California)

  • Maria Ogneva

    (University of Southern California)

Abstract

Bradshaw and Sloan (2002, Journal of Accounting Research, 40, 41–66.) document a significant increase in the difference between the earnings response coefficients (ERCs) for GAAP and Street (I/B/E/S) earnings over the 1990s, suggesting that the market has become increasingly reliant or fixated on Street earnings. In this study we investigate whether, alternatively, an “errors in variables” problem caused by a mismatch between the definitions of realized and expected earnings drives the ERC divergence. Our findings suggest that results from conventional analyses of GAAP and Street ERCs, including the ERC divergence pattern, are significantly contaminated by measurement errors in earnings surprises.

Suggested Citation

  • Daniel A. Cohen & Rebecca N. Hann & Maria Ogneva, 2007. "Another look at GAAP versus the Street: an empirical assessment of measurement error bias," Review of Accounting Studies, Springer, vol. 12(2), pages 271-303, September.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:2:d:10.1007_s11142-007-9029-0
    DOI: 10.1007/s11142-007-9029-0
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    References listed on IDEAS

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    1. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
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    4. Collins, Daniel W. & Kothari, S. P., 1989. "An analysis of intertemporal and cross-sectional determinants of earnings response coefficients," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 143-181, July.
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    8. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 41-66, March.
    9. Jeffrey T. Doyle & Russell J. Lundholm & Mark T. Soliman, 2006. "The Extreme Future Stock Returns Following I/B/E/S Earnings Surprises," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 44(5), pages 849-887, December.
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    Cited by:

    1. Theodore E. Christensen, 2012. "Discussion of “Why do pro forma and street earnings not reflect changes in GAAP? Evidence from SFAS 123R”," Review of Accounting Studies, Springer, vol. 17(3), pages 563-571, September.
    2. Mary E. Barth & Ian D. Gow & Daniel J. Taylor, 2012. "Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R," Review of Accounting Studies, Springer, vol. 17(3), pages 526-562, September.
    3. Frank Heflin & Charles Hsu & Qinglu Jin, 2015. "Accounting conservatism and Street earnings," Review of Accounting Studies, Springer, vol. 20(2), pages 674-709, June.
    4. Chih-Ying Chen, 2010. "Do analysts and investors fully understand the persistence of the items excluded from Street earnings?," Review of Accounting Studies, Springer, vol. 15(1), pages 32-69, March.
    5. Theodore E. Christensen, 2007. "Discussion of “another look at GAAP versus the Street: an empirical assessment of measurement error bias”," Review of Accounting Studies, Springer, vol. 12(2), pages 305-321, September.

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    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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