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The Differential Value Relevance of S&P's Core Earnings Versus GAAP Earnings: The Role of Stock Option Expense


  • Matthew M. Wieland,

    1. Kelley School of Business, Indianapolis, USA
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  • Mark C. Dawkins,

    Corresponding author
    • Terry College of Business, University of Georgia, Athens, Georgia, USA
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  • Michael T. Dugan

    1. College of Business, University of Southern Mississippi, Hattiesburg, USA
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    • The authors appreciate the very insightful comments and advice of the anonymous referee and Martin Walker (Editor). We thank Ben Ayers, Steve Baginski, Linda Bamber, Michael Bamber, Dennis Beresford, Andrew Call, Keji Chen, Jennifer Gaver, Robert Hoyt, Robert Ingram, Ken Klassen, David Koo, Stacie Laplante, D. Craig Nichols, Santhosh Ramalingegowda, Austin Reitenga, Casey Schwab, Mary Stone, Gary Taylor, Eric Yeung, and participants at the Southeast Summer Accounting Research Colloquium, the University of Alabama, and the University of Georgia for many helpful comments and suggestions. The first and second authors gratefully acknowledge the financial support of the Terry College of Business, and the third author Horne LLP.

Address for correspondence: Mark Dawkins, Associate Professor, Terry College of Business, University of Georgia, 341 Brooks Hall, Athens, GA 30602, USA. e-mail:


In 2002, Standard & Poor's (S&P) introduced Core Earnings as a proprietary, uniform earnings metric, with the goal of improving financial reporting. The distinguishing feature of Core Earnings is its consistent treatment of seven adjustments to GAAP earnings for which there is no consensus adjustment by managers and analysts. We use stock price and return data to assess whether investors perceive Core Earnings to be more value relevant than GAAP earnings. The implementation of FASB 123R changed the calculation of GAAP and Core Earnings. This change allows us to assess the role of stock option expense in the valuation of earnings numbers by partitioning the sample into pre- and post-FASB 123R periods and creating consistent measures of GAAP and Core Earnings. Our price results indicate that Core Earnings is more value relevant than GAAP earnings in the pre-period after controlling for stock option expense, and in the post-FASB 123R periods. The price results provide empirical evidence consistent with S&P's expectation that a uniformly calculated earnings measure is a more consistent and useful indicator of current performance and future earnings.