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Investor Sentiment and Pro Forma Earnings Disclosures

Journal of Accounting Research, Vol. 50, No. 1, pp. 1-50, March 2012

45 Pages Posted: 3 Aug 2008 Last revised: 20 Feb 2012

Nerissa C. Brown

University of Delaware - Accounting & MIS

Theodore E. Christensen

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

W. Brooke Elliott

University of Illinois at Urbana-Champaign

Richard Mergenthaler Jr.

University of Iowa - Henry B. Tippie College of Business

Date Written: August 1, 2011

Abstract

This study examines the influence of investor sentiment on managers’ discretionary disclosure of “pro forma” (adjusted) earnings metrics in earnings press releases. We find that managers’ propensity to disclose an adjusted earnings metric increases with the level of investor sentiment and, in particular, the propensity to disclose an adjusted number that exceeds the GAAP earnings figure. Further, our analyses suggest that as investor sentiment increases, managers (1) exclude higher levels of both recurring and nonrecurring expenses in calculating the pro forma earnings number and (2) emphasize the pro forma figure by placing it more prominently within the earnings press release. Additional analyses indicate that the association between investor sentiment and managers’ pro forma disclosure decisions at least partly reflects opportunistic motives. Finally, we find that managers’ own sentiment-driven expectations also play a role in their pro forma disclosure decisions.

Keywords: investor sentiment, pro forma earnings, corporate disclosure

JEL Classification: G14, G18, M41, M45

Suggested Citation

Brown, Nerissa C. and Christensen, Theodore E. and Elliott, W. Brooke and Mergenthaler, Richard, Investor Sentiment and Pro Forma Earnings Disclosures (August 1, 2011). Journal of Accounting Research, Vol. 50, No. 1, pp. 1-50, March 2012. Available at SSRN: https://ssrn.com/abstract=1194822

Nerissa C. Brown (Contact Author)

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Theodore E. Christensen

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

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

W. Brooke Elliott

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Richard Dean Mergenthaler Jr.

University of Iowa - Henry B. Tippie College of Business ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0848 (Phone)

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