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Accounting conservatism and Street earnings

Author

Listed:
  • Frank Heflin

    (Florida State University)

  • Charles Hsu

    (Hong Kong University of Science and Technology)

  • Qinglu Jin

    (Shanghai University of Finance and Economics)

Abstract

This paper provides evidence that conditional conservatism reduces the usefulness of GAAP earnings for valuation by investors. We find that conditional conservatism reduces GAAP earnings persistence and informativeness, makes income smoothing more difficult, and makes forecasting GAAP earnings more difficult for analysts. We also find that analysts forecast Street earnings numbers with less conditional conservatism. The decrease in conditional conservatism from adjusting GAAP earnings to Street earnings leads to improvements in persistence, smoothing, and informativeness and reduces analysts’ forecast errors and dispersion. Furthermore, as GAAP conditional conservatism increases, (1) Street earnings more likely differ from GAAP, and (2) the magnitude of the difference between Street and GAAP earnings increases. Finally, we find that exclusions (from GAAP to Street) are of higher quality for firms with higher GAAP conditional conservatism. Our results suggest that, as the conditional conservatism of GAAP earnings increases, analysts’ exclusions make Street earnings more useful to investors.

Suggested Citation

  • Frank Heflin & Charles Hsu & Qinglu Jin, 2015. "Accounting conservatism and Street earnings," Review of Accounting Studies, Springer, vol. 20(2), pages 674-709, June.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:2:d:10.1007_s11142-014-9311-x
    DOI: 10.1007/s11142-014-9311-x
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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