Analysts’ EPS-Decreasing Exclusions and Target Price Forecasts

We examine the relation between individual analysts’ exclusions that result in lower street earnings per share (EPS) forecasts than their EPS forecasts based on generally accepted accounting principles (i.e., EPS-decreasing exclusions) and the optimism of their target price forecasts. We document that analysts’ EPS-decreasing exclusions from their annual forecasts mainly relate to positive nonrecurring items already reported by the firm. We find that analysts’ EPS-decreasing exclusions are associated with more optimistic target prices. Our results also suggest that analysts’ EPS-decreasing exclusions contribute to the optimism in their target prices by enabling analysts to project higher earnings growth. Further analyses reveal that the relation between analysts’ EPS-decreasing exclusions and target price optimism is attributable, at least in part, to analysts’ strategic incentives for issuing favorable valuations. This paper was accepted by Eric So, accounting. Funding: S. A. Larocque acknowledges the financial support of the KPMG Fellowship at the Mendoza College of Business. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.03627 .