Empirical Evidence on Recent Trends in Pro Forma Reporting
- 1 March 2004
- journal article
- Published by American Accounting Association in Accounting Horizons
- Vol. 18 (1) , 27-43
- https://doi.org/10.2308/acch.2004.18.1.27
Abstract
This study provides descriptive evidence on the controversial trend adopted by many firms in recent years of reporting earnings figures on a pro forma basis. pro forma earnings exclude normal income statement items that managers deem to be nonrecurring or nonrepresentative of ongoing operations. We examine a large sample of actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers tend to be relatively “young” firms that are concentrated primarily in the tech sector and business services industries, and that they are significantly less profitable, more liquid, and have higher debt levels, P-E ratios, and book-to-market ratios than other firms in their own industries. Our results indicate that while firms commonly exclude multiple expenses in arriving at their pro forma earnings figure, they usually do not exclude the same items in subsequent pro forma announcements. These results support the criticism that pro forma announcements are often motivated by managers' desires to meet or beat analysts' expectations or to avoid earnings decreases.Keywords
This publication has 9 references indexed in Scilit:
- Earnings Informativeness and Strategic Disclosure: An Empirical Examination of “Pro Forma” EarningsThe Accounting Review, 2004
- Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earningsJournal of Accounting and Economics, 2003
- Comparing the Value Relevance of Two Operating Income MeasuresReview of Accounting Studies, 2003
- Do Managers Use Pro Forma Earnings to Exceed Analyst Forecasts?SSRN Electronic Journal, 2002
- GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of EarningsJournal of Accounting Research, 2002
- Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your PortfolioReview of Accounting Studies, 2002
- Are Investors Misled by 'Pro Forma' Earnings?SSRN Electronic Journal, 2002
- Technology, Information Production, and Market EfficiencySSRN Electronic Journal, 2001
- Earnings management to avoid earnings decreases and lossesJournal of Accounting and Economics, 1997