Optimistic Reporting and Pessimistic Investing: Do Pro Forma Earnings Disclosures Attract Short Sellers?

2010 ◽  
Author(s):  
Theodore E. Christensen ◽  
Michael S. Drake ◽  
Jacob R. Thornock
Keyword(s):  
Short Sellers ◽  
Pro Forma Earnings ◽  
Earnings Disclosures ◽  
Pro Forma

Optimistic Reporting and Pessimistic Investing: Do Pro Forma Earnings Disclosures Attract Short Sellers?

2013 ◽  
Vol 31 (1) ◽  
pp. 67-102 ◽  
Author(s):  
Theodore E. Christensen ◽  
Michael S. Drake ◽  
Jacob R. Thornock
Keyword(s):  
Short Sellers ◽  
Pro Forma Earnings ◽  
Earnings Disclosures ◽  
Pro Forma

Do Managers Use Pro Forma Earnings Disclosures to Cater to Investor Sentiment?*

2008 ◽  
Author(s):  
Nerissa C. Brown ◽  
Theodore E. Christensen ◽  
W. Brooke Elliott ◽  
Richard Dean Mergenthaler
Keyword(s):  
Investor Sentiment ◽  
Pro Forma Earnings ◽  
Earnings Disclosures ◽  
Pro Forma

The Effects of Pro Forma Earnings Disclosures on Analysts' and Nonprofessional Investors' Equity Valuation Judgments

2004 ◽  
Vol 79 (3) ◽  
pp. 667-686 ◽  
Author(s):  
James R. Frederickson ◽  
Jeffrey S. Miller
Keyword(s):  
Stock Price ◽  
Cash Flows ◽  
Earnings Announcement ◽  
Nonprofessional Investors ◽  
Earnings Information ◽  
Pro Forma Earnings ◽  
Performance Metric ◽  
Earnings Disclosures ◽  
A Company ◽  
Pro Forma

This paper presents an experiment that examines the effect of pro forma earnings disclosures on the judgments of analysts (i.e., more sophisticated investors) and nonprofessional (i.e., less sophisticated) investors. In the experiment, participants developed stock price assessments after reviewing background financial information and a current earnings announcement for a company. The earnings announcement was manipulated to report only GAAP earnings in one condition and both pro forma and GAAP earnings in the other condition. Consistent with empirical evidence, the pro forma earnings in our experiment exceeded GAAP earnings. The results indicate that nonprofessional investors who received an earnings announcement that contained both pro forma and GAAP disclosures assessed a higher stock price than did nonprofessionals who received an announcement containing only GAAP disclosures. Financial analysts' stock price judgments were not affected by the pro forma disclosures. Followup analyses suggest that analysts and nonprofessional investors used different valuation models and information processing. Analysts used well-defined valuation models, based on either earnings-multiples or cash flows, while the nonprofessional investors were more likely to use simpler, heuristic-based valuation models. The pro forma disclosure did not cause nonprofessional investors to assess a higher earnings number for determining a stock price, but rather caused nonprofessionals to perceive the earnings announcement as more favorable, which in turn caused them to convert earnings or some other performance metric into a higher stock price. This effect appears to be due to unintentional cognitive effects, rather than nonprofessionals relying on pro forma earnings information because they perceived it to be informative.

Has the Regulation of Pro Forma Reporting in the US Changed Investors’ Perceptions of Pro Forma Earnings Disclosures?

2012 ◽  
Vol 39 (7-8) ◽  
pp. 876-904 ◽  
Author(s):  
Dirk E. Black ◽  
Ervin L. Black ◽  
Theodore E. Christensen ◽  
William G. Heninger
Keyword(s):  
Pro Forma Earnings ◽  
The Us ◽  
Earnings Disclosures ◽  
Pro Forma

CEO Compensation Incentives and Pro Forma Earnings Disclosures

2013 ◽  
Author(s):  
Dirk E. Black ◽  
Ervin L. Black ◽  
Theodore E. Christensen ◽  
Kurt H. Gee
Keyword(s):  
Ceo Compensation ◽  
Pro Forma Earnings ◽  
Earnings Disclosures ◽  
Pro Forma ◽  
Compensation Incentives

scholarly journals Who Trades on Pro Forma Earnings Information?

2007 ◽  
Vol 82 (3) ◽  
pp. 581-619 ◽  
Author(s):  
Nilabhra Bhattacharya ◽  
Ervin L. Black ◽  
Theodore E. Christensen ◽  
Richard D. Mergenthaler
Keyword(s):  
Individual Investors ◽  
Press Releases ◽  
Earnings Surprise ◽  
Earnings Information ◽  
Pro Forma Earnings ◽  
Sarbanes Oxley ◽  
Core Earnings ◽  
Earnings Disclosures ◽  
Pro Forma ◽  
Financial Press

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 earnings. On the other hand, regulators, policymakers, and the financial press often allege that managers' pro forma earnings disclosures are opportunistic attempts to mislead investors. Recent evidence suggests that while many pro forma earnings disclosures are altruistically motivated, some may represent managers' attempts to portray overly optimistic financial performance. If this is the case, then less wealthy, less sophisticated, individual investors are arguably the most at risk of being misled. Consequently, this study investigates who trades on pro forma earnings information. Our intraday investigation of transactions around earnings announcements containing pro forma earnings information reveals that less sophisticated investors' announcement-period abnormal trading is significantly positively associated with the magnitude and direction of the earnings surprise based on pro forma earnings. In contrast, we find no association between sophisticated investors' trading and manager-reported pro forma information. Overall, our analyses and numerous robustness tests suggest that the segment of the market that relies on pro forma earnings information is populated predominantly by less sophisticated individual investors. This evidence is particularly relevant to standard-setters and regulators given that Section 401(b) of the Sarbanes-Oxley Act of 2002 and subsequent SEC regulations are specifically designed to protect ordinary investors from misleading pro forma information.

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