The Impact of Graphical Displays of Pro Forma Earnings Information on Professional and Nonprofessional Investors' Earnings Judgments

2010 ◽  
Author(s):  
William N. Dilla ◽  
Diane Joyce Janvrin ◽  
Cynthia G. Jeffrey
Keyword(s):  
Nonprofessional Investors ◽  
Earnings Information ◽  
Graphical Displays ◽  
Pro Forma Earnings ◽  
The Impact ◽  
Pro Forma

The Impact of Graphical Displays of Pro Forma Earnings Information on Professional and Nonprofessional Investors' Earnings Judgments

2012 ◽  
Vol 25 (1) ◽  
pp. 37-60 ◽  
Author(s):  
William N. Dilla ◽  
Diane J. Janvrin ◽  
Cynthia Jeffrey
Keyword(s):  
Data Availability ◽  
Fiscal Year ◽  
Nonprofessional Investors ◽  
Earnings Information ◽  
Graphical Displays ◽  
Pro Forma Earnings ◽  
Presentation Formats ◽  
Earnings Performance ◽  
The Impact ◽  
Pro Forma

ABSTRACT: Regulation G (SEC 2003b) requires managers to reconcile textual non-GAAP performance measures (i.e., pro forma disclosures) to GAAP. Graphical disclosures also require reconciliation; however, neither the format nor the placement of the reconciliation is specified. We apply cognitive fit theory to argue that the influence of graphical information presentation formats is contingent on investor type and judgment complexity. Participants in our study viewed a simulated Investor Relations website for a large drug retailer and made judgments regarding current fiscal year earnings performance, earnings potential, and investment amount. We manipulated graphical (GAAP-only versus GAAP and pro forma) and textual (GAAP-only versus pro forma reconciled to GAAP) earnings disclosure content in a 2 × 2 between-participants design. We find that nonprofessional investors' current fiscal year earnings performance, earnings potential, and investment amount judgments are all influenced by graphical displays, which include pro forma as opposed to GAAP-only earnings information. Graphical displays of pro forma earnings information do not influence professional investors' current year earnings performance judgments; however, these displays do influence professional investors' earnings potential and investment amount judgments because they are more complex. Our results suggest a need to further examine the influence of graphical pro forma earnings presentation formats on investor judgments. Data Availability: Contact the first author.

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.

Earnings Informativeness and Strategic Disclosure: An Empirical Examination of “Pro Forma” Earnings

2004 ◽  
Vol 79 (3) ◽  
pp. 769-795 ◽  
Author(s):  
Barbara A. Lougee ◽  
Carol A. Marquardt
Keyword(s):  
Market Efficiency ◽  
Predictive Ability ◽  
Press Releases ◽  
Empirical Examination ◽  
Strategic Disclosure ◽  
Earnings Information ◽  
Pro Forma Earnings ◽  
Earnings Informativeness ◽  
Earnings Surprises ◽  
Pro Forma

This paper provides evidence on the characteristics of firms that include “pro forma” earnings information in their press releases, whether the usefulness of pro forma earnings to investors varies systematically with these characteristics, and whether the investor response to pro forma earnings is consistent with market efficiency or mispricing. Using a sample of 249 press releases from 1997–99, we find that firms with low GAAP earnings informativeness are more likely to disclose pro forma earnings than other firms. We also find that strategic considerations, measured using the direction of GAAP earnings surprises, are an important determinant of pro forma reporting. In addition, our examination of the relative and incremental information content of pro forma earnings shows that investors find pro forma earnings to be more useful when GAAP earnings informativeness is low or when strategic considerations are absent. Tests of the predictive ability of pro forma earnings for future profitability and returns are mixed, and we therefore cannot conclusively determine whether the investor reaction to pro forma earnings at the time of the press release is consistent with market efficiency or mispricing. The paper contributes to the growing literature on pro forma earnings and more generally to the literature on voluntary and strategic disclosure.

Pro Forma Earnings Presentation Effects and Investment Decisions

2017 ◽  
Vol 29 (2) ◽  
pp. 11-24 ◽  
Author(s):  
Brian R. Hogan ◽  
Ganesh Krishnamoorthy ◽  
James J. Maroney
Keyword(s):  
Investment Decisions ◽  
Performance Assessments ◽  
Data Availability ◽  
Future Research ◽  
Earnings Information ◽  
Pro Forma Earnings ◽  
Income Statement ◽  
Earnings Performance ◽  
The Difference ◽  
Pro Forma

ABSTRACT Reacting to the criticism that companies routinely mislead investors by emphasizing non-GAAP or pro forma numbers, the SEC promulgated Regulation G in 2003, which requires firms to provide a reconciliation of the pro forma and GAAP numbers. In this study, we conduct an experiment to examine how investors' GAAP and non-GAAP earnings performance assessments affect their financial evaluations and investment decisions based on the presentation format of the reconciliation (presenting a full non-GAAP income statement, referred to as the full NGIS format, versus presenting only the items that caused the difference between GAAP and non-GAAP measures, referred to as the summary NGIS format). We find that even though a summary NGIS format for the reconciliation of pro forma earnings does not increase the perceived non-GAAP earnings performance, it does increase the weight given to non-GAAP earnings performance when making investment-related judgments and decisions, relative to a full NGIS format. These findings regarding the evaluation and weighting of non-GAAP earnings performance extend prior studies and suggest that non-GAAP earnings information may be processed differently based upon the format of the reconciliation. Further, our finding regarding the weighting of non-GAAP earnings performance is inconsistent with the concern expressed by the SEC that the full NGIS format may give greater prominence to non-GAAP information. Finally, the implications of these findings for regulators, investors, and future research are discussed. Data Availability: Contact the authors.

eToys Inc.: A Case Examining Pro Forma Financial Reports, Analysts' Forecasts, and Going Concern Disclosures

2003 ◽  
Vol 18 (2) ◽  
pp. 191-209 ◽  
Author(s):  
Iris C. Stuart ◽  
Vijay Karan
Keyword(s):  
Financial Statements ◽  
Financial Information ◽  
Press Releases ◽  
Financial Reports ◽  
The Public ◽  
Going Concern ◽  
Pro Forma Earnings ◽  
Financial Disclosures ◽  
The Impact ◽  
Pro Forma

This case is designed to provide you with the opportunity to examine several reporting issues, in the period between an IPO and bankruptcy filing, for a “dotcom” company that failed. You will consider the information provided to outside users of financial statements in several company reporting mechanisms including the financial disclosures made by the company in its 10-Q and 10-K filings to the SEC, the pro forma earnings reported in press releases, and the information available to the public to evaluate a going concern assumption. Further, you will also examine the impact of analysts' forecasts on management's release of financial information to the public.

scholarly journals Alternative performance measures: An assessment after ESMA Guidelines

2019 ◽  
Vol 17 (1) ◽  
pp. 50-59
Author(s):  
Vincenzo Foglia Manzillo ◽  
Alessandro Giannozzi ◽  
Gianluca Vittorioso ◽  
Oliviero Roggi
Keyword(s):  
Performance Measures ◽  
Stock Prices ◽  
Positive Impact ◽  
Relevant Information ◽  
European Regulation ◽  
Asymmetry Of Information ◽  
Pro Forma Earnings ◽  
The Press ◽  
The Impact ◽  
Pro Forma

In July 2016, ESMA Guidelines that set out principles regarding the presentation of non-GAAP measures (ESMA Guidelines on Alternative Performance Measures – APMs) became effective. The guidelines should reduce the mispricing caused by pro forma earnings, and improve investor protection and the transparency of financial information. We provide a preliminary assessment of the impact of these guidelines on 2016 reports on a sample of European Small and medium-sized enterprises (SMEs) listed on regulated markets. Using univariate and multivariate regressions, we demonstrate a significant relationship between Alternative performance measures disclosed in the press releases and stock prices in the period after the ESMA Guidelines. APMs are relevant information for investors and more adherence to the ESMA reporting guidelines may generate a positive impact on stock prices and short-term returns. The findings also contribute to demonstrate that the European regulation about non-GAAP measures will reduce the asymmetry of information between users, particularly between capital owners and management, which may lead to increased users’ confidence since they will be able to evaluate more effectively issuers’ performance.

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.

Are Investors Influenced by Pro Forma Emphasis and Reconciliations in Earnings Announcements?

2006 ◽  
Vol 81 (1) ◽  
pp. 113-133 ◽  
Author(s):  
W. Brooke Elliott
Keyword(s):  
Opposite Direction ◽  
Earnings Announcements ◽  
Cognitive Effect ◽  
Nonprofessional Investors ◽  
Pro Forma Earnings ◽  
Mere Presence ◽  
Earnings Performance ◽  
Pro Forma

This study presents the results of an experiment that examines how two underlying characteristics of pro forma earnings announcements, pro forma emphasis and the presence of a quantitative reconciliation, influence nonprofessional investors' and analysts' reliance on pro forma disclosures. The results indicate that the emphasis management places on pro forma earnings, not the mere presence of pro forma earnings, influences nonprofessional investors' judgments and decisions, but that this influence is mitigated by the presence of a quantitative reconciliation. Further analysis reveals that the influence of pro forma emphasis on nonprofessional investors' judgments and decisions seems to be the result of an unintentional cognitive effect as opposed to the perceived informativeness of the earnings figure emphasized by management. Analysts' judgments and decisions were also affected by the presence of reconciliation, but in the opposite direction to those of nonprofessional investors. Specifically, the presence of a quantitative reconciliation led analysts to view pro forma earnings as more reliable, increasing their reliance on the pro forma disclosure in judging the earnings performance of the firm.

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