Pro Forma Earnings Disclosures: Do Analysts and Nonprofessional Investors React Differently?

2002 ◽  
Author(s):  
James R. Frederickson ◽  
Jeffrey S. Miller
Keyword(s):  
Nonprofessional Investors ◽  
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.

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

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

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.

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
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