A Guide to the Ga(a)p in the Street - A Quantitative Analysis of Sell-side Analysts' Exclusion Decisions Regarding Special Item Subcomponents and the Impact of Management Guidance on Street Earnings

Abstract: Firms' performance is reported by means of up to three earnings measures: firms' mandatory GAAP, firms' complementary pro forma and sell-side analysts' street earnings. The latter two measures (non-GAAP) are derived through the exclusion of earnings components, special (i.e. non-recurring) and incremental (i.e. recurring) items, from GAAP earnings. Knowledge on the composition and interaction of both figures is little and mainly restricted to US settings. This thesis thus explores sell-side analysts' treatment of special items subcomponents in the derivation of street earnings and the impact of management guidance on sell-side analysts' exclusion decisions on Swedish data. It thereby enhances a US study by Christensen et al. (2011) to account for both, management-centric and earnings components-centric perspectives. The findings are as follows: 1) Sell-side analysts to a large extent exclude special items in their street earnings. The treatment of subcomponents thereby does not differ significantly. 2) Management guidance increases sell-side analysts' exclusions but no effect of firm guidance on analysts' treatment of special items subcomponents can be determined. 3) Most US research findings on street earnings are confirmed for the Swedish setting, suggesting similarities between both jurisdictions despite different accounting regimes and capital market dynamics.