On the Informativeness of Unexpected Exclusions from Street Earnings

Most prior research examining exclusions from street earnings (i.e., the difference between actual GAAP and street earnings) does not distinguish between exclusions that were expected versus unexpected by analysts. We consider that exclusions reflect both amounts forecasted ex ante by analysts (expected exclusions) and amounts revealed after earnings were reported (unexpected exclusions). We investigate the properties of expected versus unexpected exclusions as well as analysts’ and investors’ reactions to unexpected exclusions. We find that unexpected exclusions are associated with both non-recurring and recurring earnings items and are positively associated with future earnings. The market’s response to unexpected exclusions is stronger when managers do not disclose non-GAAP earnings and analysts’ response to unexpected exclusions is stronger when earnings miss the consensus forecast. Our evidence suggests that distinguishing between expected and unexpected exclusions is useful for forecasting future earnings and valuation, and that managers’ reporting choices and earnings performance influence the market’s and analysts’ response to unexpected exclusions.