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Analysts' Incentives and Street Earnings
Bok Baik, Florida State University
David B. Farber, University of Missouri- Columbia
Kathy R. Petroni, Michigan State University
ABSTRACT. In this paper,we examine whether analysts’ economic incentives influence their estimates of street earnings of glamour stocks. We predict that analysts are more likely to make income-increasing adjustments for potentially transitory items in determining street earnings for stocks with glamour characteristics than for stocks with value characteristics. Consistent with our prediction, we find that analysts are more likely to exclude expense items from street earnings for glamour stocks than for value stocks. In addition, we find that the excluded expense items are useful in predicting future earnings for glamour stocks, but not for value stocks. Overall, our results suggest that analysts’ self-interest is an important determinant of street earnings and that this self-interest leads to street earnings that are less useful in predicting future earnings for glamour stocks compared to value stocks.
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