How Thomson Reuters Impacts Street Earnings

In capital markets, investors and analysts often look to the past to predict the future. It’s called forecasting, and businesses use software tools and systems to analyze large amounts of historical data over long periods to identify patterns and predict future demand and trends to make better business decisions. One of the biggest data providers is Thomson Reuters, which provides aggregated financial and legal data and news, but do these services do more than just provide information?

Researchers are trying to determine just how much value Thomson Reuters and other forecast data providers add in capital markets. New research from the University of Maryland’s Robert H. Smith School of Business concludes that the way Thomson Reuters and similar services report information influences asset pricing.

In research published in the Journal of Accounting Research, Smith accounting professor Musa Subasi and his co-authors – Khrystyna Bochkay of the University of Miami, Stan Markov of the University of Texas at Dallas, and Eric Weisbrod of the University of Kansas – looked at how Thomson Reuters produces and distributes street earnings to better understand the role forecast data providers play in capital markets.

“We document that [forecast data providers] play a broader role in capital markets through their influence on the properties of street earnings and their effects on other intermediaries,” write the researchers.

Thomson Reuters and others aggregate and disseminate information produced by analysts, such as earnings estimates, stock recommendations, and street earnings. Street earnings are forecasted or actual GAAP earnings – a common set of earnings standards used by publicly traded companies to standardize financial reporting – adjusted for expenses that don’t involve cash transactions and one-time items that aren’t part of a company’s ongoing business operations.

In September 2009, Thomson Reuters discontinued its practice of relying on analysts to determine the treatment of unexpected charges and gains in favor of their immediate exclusion from street earnings.

Subasi and his co-authors show that Thomson Reuters’ change in its methodology resulted in street earnings that are more predictive of future performance.

“We also find an increased reliance on Thomson Reuters’ street earnings by financial analysts, resulting in more accurate and less dispersed analyst forecasts,” wrote the researchers.

The researchers also show that a significant portion of Thomson Reuters’ effect on price discovery is through its effect on analysts; and that the change in their treatment of unexpected items increased the relative influence of Thomson Reuters on the pricing of street earnings.

“As a consequence of the methodology change, we also find that Thomson Reuters’ relative role in the pricing of street earnings is stronger – and analysts’ role weaker – following the methodology change,” they wrote.

Overall, the researchers conclude that Thomson Reuters and other forecast data providers play a broader role in capital markets than merely aggregating and disseminating analyst-produced information.

“Given the growing importance of forecast data provider-produced information in capital markets, and the vast discretion [these providers] have in their methodology choices, our findings should also be relevant to regulators tasked with capital market oversight,” the researchers say.

Read the research, “The Roles of Data Providers and Analysts in the Production, Dissemination, and Pricing of Street Earnings,” in the Journal of Accounting Research.