Effects of winsorization: The cases of forecasting non-GAAP and GAAP earnings

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This study examines how the winsorization procedure affects the performance of regression-based earnings forecasting models. I find that the impact is multifaceted and depends principally on three factors: the level of data errors in the tails, the characteristics of firms affected by the process, and the use of scaling. For a non-GAAP earnings yield specification, where data input errors exist, winsorization changes the information set in a non-systematic way and helps to improve the performance of regression-based forecasts, especially when the least squares estimator is employed. However, for a non-GAAP earnings per share specification, with fewer data input errors found in the tails of the distribution, winsorization has a particularly strong effect on very large companies, lowering the economic value of earnings predictions. I observe similar results for corresponding GAAP earnings specifications. Robust estimators, such as least absolute deviation, high breakdown-point and Theil-Sen, appear to be a more effective solution than winsorization. Their earnings forecasts consistently yield significant positive abnormal returns across non-GAAP and GAAP earnings specifications.

Original languageEnglish
Pages (from-to)105-135
Number of pages31
JournalJournal of Business Finance and Accounting
Issue number1-2
Early online date15 Jan 2019
Publication statusPublished - 14 Feb 2019


  • earnings forecasts
  • influential observations
  • robust regression
  • scaling
  • stock returns
  • winsorization


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