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

45 Pages Posted: 22 Jul 2010 Last revised: 16 Apr 2013

See all articles by William N. Dilla

William N. Dilla

Iowa State University - Department of Accounting and Finance

Diane Joyce Janvrin

Iowa State University - Department of Accounting and Finance

Cynthia Jeffrey

Iowa State University

Date Written: July 21, 2010

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 web site for a large drug retailer and made judgments regarding current fiscal year earnings performance, earnings potential, and investment amount. We manipulated graphical (GAAP-only vs. GAAP and pro forma), and textual (GAAP-only vs. pro forma reconciled to GAAP) earnings disclosure content in a 2 x 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.

Keywords: pro forma earnings, nonprofessional investors, Regulation G, information presentation, graphical displays

JEL Classification: C91, D83, M41

Suggested Citation

Dilla, William N. and Janvrin, Diane Joyce and Jeffrey, Cynthia G., The Impact of Graphical Displays of Pro Forma Earnings Information on Professional and Nonprofessional Investors' Earnings Judgments (July 21, 2010). Behavioral Research in Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1646607 or http://dx.doi.org/10.2139/ssrn.1646607

William N. Dilla (Contact Author)

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Diane Joyce Janvrin

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Cynthia G. Jeffrey

Iowa State University ( email )

396 Carver Hall
320 Carver Hall
Ames, IA 50011-2063
United States
515-294-9427 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
339
Abstract Views
2,192
Rank
161,564
PlumX Metrics