Analysts' EPS-Decreasing Exclusions and Target Price Forecasts.

This article investigates the relationship between individual financial analysts’ exclusions of positive nonrecurring earnings items—termed EPS-decreasing (EPSD) exclusions, which lower street earnings per share (EPS) forecasts relative to GAAP EPS forecasts—and the optimism embedded in their target price forecasts. Using a large sample of analyst forecasts from 2003 to 2020, the study finds that EPSD exclusions predominantly relate to positive one-time items already reported by firms and are associated with more optimistic target prices, partly because these exclusions enable analysts to project higher future earnings growth. The analysis further reveals that this association is stronger among analysts with greater strategic incentives to issue favorable valuations and those issuing buy recommendations, suggesting that EPSD exclusions serve as a tool for justifying optimistic target prices. These findings contribute to understanding how analysts’ definitions of earnings and their discretionary exclusions influence valuation forecasts, with implications for investors and regulators monitoring non-GAAP reporting and analyst behavior.