The Risk-Relevance of Street Earnings

46 Pages Posted: 14 Aug 2018 Last revised: 9 Jun 2020

See all articles by Frank Heflin

Frank Heflin

University of Georgia - J.M. Tull School of Accounting

Kalin S. Kolev

City University of New York (CUNY) - Stan Ross Department of Accountancy

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: May 29, 2020

Abstract

Risk is an important earnings attribute in valuation models and the FASB’s conceptual framework identifies providing information about risk as a primary objective for earnings. Managers and analysts, however, state that they provide non-GAAP earnings to produce numbers that are more focused on core or cash-based earnings components. They do not discuss risk-relevance as a motivation. We ask whether, by focusing on one earnings attribute (core earnings), non-GAAP earnings sacrifice another important earnings attribute (risk-relevance). We find that non-GAAP earnings capture the more risk-relevant components of GAAP earnings, although non-GAAP exclusions are not risk-irrelevant. Further, not only do non-GAAP earnings better capture information about current risk, they also provide more information about future firm risk. Finally, when comparing exclusion types, we find that special item exclusions contain more risk-relevant information than other item exclusions. Overall, we conclude that in constructing non-GAAP earnings to better capture core earnings, non-GAAP earnings also provide investors with a more risk-focused earnings construct.

Keywords: non-GAAP earnings, non-GAAP exclusions, special items, other exclusions, equity risk, risk-relevance

JEL Classification: D82, M41

Suggested Citation

Heflin, Frank and Kolev, Kalin S. and Whipple, Benjamin C., The Risk-Relevance of Street Earnings (May 29, 2020). Baruch College Zicklin School of Business Research Paper No. 2018-08-01, Available at SSRN: https://ssrn.com/abstract=3222893 or http://dx.doi.org/10.2139/ssrn.3222893

Frank Heflin

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706-542-1616 (Phone)
706-542-3630 (Fax)

Kalin S. Kolev (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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