Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings

The valuation impact of reconciling pro forma earnings to GAAP earnings

Regulation G requires all companies to quantitatively reconcile pro forma earnings with GAAP earnings. This paper provides three findings related to the impact of reconciliations on mispricing of pro forma earnings. First, prior to Reg G, we find that mis-pricing of pro forma earnings is limited to firms with low reconciliation quality. There is no evidence of mispricing for firms with high rec...

The Effects of the Media on the Discrepancy Between GAAP and Pro Forma Earnings

Who Trades on Pro Forma Earnings Information?

In recent years, many companies have emphasized adjusted-GAAP earnings numbers in their quarterly press releases. While managers use different names to describe these nonstandard earnings metrics, the financial press frequently refers to them as ‘‘pro forma’’ earnings. Managers and other advocates of pro forma reporting argue that these disclosures provide a clearer picture of companies’ core e...

Are Investors Misled by “Pro Forma” Earnings?

This paper documents the frequency and magnitude of “pro forma” earnings in press releases issued during June through August 2000 and describes the 433 firms that engaged in this financial disclosure strategy. We then use a market multiples approach to determine if investors assign a higher (or lower) share price to pro forma firms than other firms. We find no evidence that pro forma firms are ...

The informativeness of earnings and management’s issuance of earnings forecasts

Theory suggests that managers issue earnings forecasts to reduce information asymmetry. An earnings forecast is more effective in reducing information asymmetry if it contains earnings news that is relatively more informative about the firm’s value. We hypothesize that a manager is more likely to issue an earnings forecast if investors perceive that earnings are more informative. We measure ear...