Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and GAAP Operating Earnings

By Nilabhra Bhattacharya, Ervin L. Black, Theodore E. Christensen, Chad R. Larson. 2003

482 citations recorded by the source corpus.

This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. Our analyses of short-window abnormal returns and revisions in analyst' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/fbc71b0033fbf5999eee058bb97fb1962e7a3930

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Citations in the corpus

Emphasis on Pro Forma Versus Gaap Earnings in Quarterly Press Releases: Determinants, Sec Intervention, and Market Reactions (2005, unknown): “…examined a number of aspects of disclosure including the amount of information disclosed (Lang and Lundholm, 1993), the type of metrics disclosed (Bhattacharya et al, 2003; Lougee and Marquardt, 2004; Francis, Schipper and Vincent; 2002), and the mechanism through which information is disclosed…”
Earnings management or forecast guidance to meet analyst expectations? (2009, unknown): “pro forma earnings or Street earnings2) are more informative and more persistent than GAAP earnings (Bradshaw and Sloan, 2002; Bhattacharya et al., 2003), the financial press and accounting regulators in the US claim that managers may be behaving opportunistically by removing value-relevant items to”
The Disclosure of Non-GAAP Earnings Information in the Presence of Transitory Gains (2014, unknown): “2003), or (b) search earnings announcements for key words indicating the disclosure of non-GAAP earnings (Bhattacharya et al. 2003).”
The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or Earnings Matter? (2011, unknown): “…interest in classification shifting (McVay 2006, Choi et al. 2007) in response to evidence on investors’ increasing reliance on adjusted measures of profitability to assess firm performance (Bradshaw and Sloan 2002, Bhattacharya et al. 2003, Brown and Sivakumar 2003, Lougee and Marquardt 2004).”
Non-GAAP earnings and board independence (2011, methodology): “1 Non-GAAP earnings, however, are more persistent than GAAP earnings (Bhattacharya et al., 2003), and firms tend to disclose non-GAAP earnings when GAAP earnings is less informative (Lougee and Marquardt, 2004), suggesting that coreearnings disclosures aid investors in predicting future earnings.”
Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items* : Financial Statement Presentation (2009, unknown): “This analysis is motivated by prior research, which provides evidence that managers engage in opportunistic reporting in other presentation decisions (e.g., Schrand and Walther 2000; Bhattacharya et al. 2003), as well as evidence that managers’ financial statement presentation decisions can affect u”
Evolution in Value Relevance of Accounting Information (2019, unknown): “Including special items effectively includes earnings before special items, which is substantially similar to operating earnings in Bhattacharya et al. (2003).”
Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R (2012, unknown): “Because operating earnings is not defined by GAAP, Bhattacharya et al. (2003) and Brown and Sivakumar (2003) study operating earnings as defined by S&P. 10 Landsman et al. (2007) obtain similar inferences using tests of predictive ability based on the Ohlson (1995, 1999) valuation model. analysts’ i”
Expectations and Investment (2015, unknown): “called “street earnings”), which adjust for certain nonrecurring items (Bradshaw and Sloan 2002; Bhattacharya et al. 2003).”
Are Investors Influenced by Pro Forma Emphasis and Reconciliations in Earnings Announcements (2006, methodology): “The items excluded from GAAP earnings to arrive at pro forma earnings were chosen based on earnings announcements of actual firms in the technology sector and are some of the most common items excluded as reported in previous archival research ( Bhattacharya et al. 2003, 2004; Bowen et al. 2005).”