Analysts' Incentives and Street Earnings

To purchase or authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-679X.2008.00311.x Byline: BOK BAIK (*), DAVID B. FARBER ([dagger]), KATHY PETRONI ([double dagger]) Abstract: ABSTRACT We examine whether analysts' incentives are associated with street earnings. Because prior research argues that analysts' incentives to promote stocks increase in the extent to which the stock exhibits glamour characteristics, we predict that analysts are more likely to make income-increasing adjustments in determining street earnings for glamour stocks than for value stocks. We find that analysts are more likely to exclude expense items from street earnings for glamour stocks than for value stocks and that excluded expense items help predict future earnings for glamour stocks but not for value stocks. Overall, our results suggest that analysts' self-interest influences street earnings and this self-interest leads to street earnings that are less useful in predicting future earnings for glamour stocks. Author Affiliation: (*)College of Business, Seoul National University ([dagger])Trulaske College of Business, University of Missouri ([double dagger])Eli Broad College of Business, Michigan State University. We thank an anonymous reviewer, Mark Bradshaw, Larry Brown, Rich Frankel, Cristi Gleason, Frank Heflin, Roby Lehavy, Sarah McVay, Rick Morton, Jay Ritter, Jenny Tucker, workshop participants at Florida State University, the University of Florida, the University of Missouri, Seoul National University, and Washington University in St. Louis, and participants at the 2007 FARS and AAA meetings for their helpful comments. David Farber acknowledges financial support from the University of Missouri Research Board. Bok Baik acknowledges financial support from Seoul National University, the Institute of Management Research at Seoul National University, and Samjong KPMG. Article History: Received 1 March 2007; accepted for publication 26 May 2008