Managers' Use of 'Pro Forma' Adjustments to Meet Strategic Earnings Benchmarks

34 Pages Posted: 5 Sep 2007 Last revised: 23 Jan 2008

See all articles by Theodore E. Christensen

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: December 2007

Abstract

The practice of reporting manager-adjusted 'pro forma' earnings numbers in quarterly earnings press releases has attracted considerable attention in recent years. Prior research suggests that while some managers report these adjusted numbers to better reflect core earnings, others may use these earnings adjustments to meet strategic earnings benchmarks on a pro forma basis when they fall short based on GAAP reporting standards. The difficulty lies in distinguishing the 'good guys' from the 'bad guys.' Using hand-collected pro forma earnings data, we investigate the extent to which different types of earnings adjustments affect the spread between pro forma earnings and GAAP earnings from continuing operations. Moreover, we investigate which types of adjustments managers use to meet strategic earnings benchmarks. In addition to the exclusion of one-time items like restructuring charges, the results indicate that managers often exclude recurring expenses such as research and development, depreciation, and stock-based compensation to meet these strategic benchmarks. The exclusion of recurring items is especially indicative of manager opportunism in pro forma reporting.

Keywords: pro forma earnings, earnings benchmarks, opportunistic financial reporting

JEL Classification: G14, M41, M43, J33

Suggested Citation

Christensen, Theodore E. and Black, Dirk E., Managers' Use of 'Pro Forma' Adjustments to Meet Strategic Earnings Benchmarks (December 2007). Available at SSRN: https://ssrn.com/abstract=1012164 or http://dx.doi.org/10.2139/ssrn.1012164

Theodore E. Christensen (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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