The Valuation Impact of Reconciling Pro Forma Earnings to GAAP Earnings

47 Pages Posted: 9 Jul 2010 Last revised: 7 Jan 2013

See all articles by Huai Zhang

Huai Zhang

Nanyang Technological University (NTU)

Liu Zheng

The University of Hong Kong - Faculty of Business and Economics

Abstract

Regulation G requires all companies to quantitatively reconcile pro forma earnings with GAAP earnings. This paper provides three findings related to the impact of reconciliations on mispricing of pro forma earnings. First, prior to Reg G, we find that mis-pricing of pro forma earnings is limited to firms with low reconciliation quality. There is no evidence of mispricing for firms with high reconciliation quality. Second, we find no evidence of mispricing after Reg G. Third, there is a cross-Reg G reduction of mispricing for firms whose reconciliation quality improves, and there continues to be no-mispricing for firms that have high reconciliation quality both before and after Reg G. Together, our results support the notion that better reconciliations reduce the extent of mispricing.

Keywords: Pro Forma Earnings, Valuation, Regulation G

JEL Classification: M41

Suggested Citation

Zhang, Huai and Zheng, Liu, The Valuation Impact of Reconciling Pro Forma Earnings to GAAP Earnings. Journal of Accounting & Economics, Vol. 51, Issues 1-2, 186-202, 2011, Available at SSRN: https://ssrn.com/abstract=1636119

Huai Zhang

Nanyang Technological University (NTU) ( email )

Nanyang Business School
50 Nanyang Ave.
Singapore, 639798
Singapore
+65-6790-4097 (Phone)

Liu Zheng (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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