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Discussion of “another look at GAAP versus the Street: an empirical assessment of measurement error bias”

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  • Theodore E. Christensen

    (Brigham Young University)

Abstract

Cohen, Hann, and Ogneva [(2007) Review of Accounting Studies, Forthcoming] provide evidence on how measurement error affects inferences this literature. In particular, they provide a theoretical framework for understanding (1) the source of differences in market reactions to GAAP and Street earnings and (2) why we observe a divergence over time between ERCs based on these two earnings metrics. Moreover, they present empirical evidence on practical solutions researchers can use to mitigate the effects of measurement error. I discuss the implications of their results and provide new empirical evidence to highlight how their results apply to future research. In particular, I use a large sample of manager-adjusted “pro forma” earnings numbers voluntarily disclosed in quarterly earnings press releases to provide additional evidence about the implications of their research. Descriptive statistics based on these data illustrate the degree of measurement error in different earnings metrics. The results suggest that additional research is needed to determine the extent to which a random walk earnings expectation and reverse regression can mitigate the effects of measurement error.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:2:d:10.1007_s11142-007-9036-1
    DOI: 10.1007/s11142-007-9036-1
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    References listed on IDEAS

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    1. Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E. & Larson, Chad R., 2003. "Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 285-319, December.
    2. Bradshaw, Mark T., 2003. "A discussion of 'Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings'," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 321-335, December.
    3. Peter Easton, 2003. "Discussion of “The Predictive Value of Expenses Excluded from Pro Forma Earnings”," Review of Accounting Studies, Springer, vol. 8(2), pages 175-183, June.
    4. 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.
    5. 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.
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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