Comparing the Value Relevance of Two Operating Income Measures

12 Pages Posted: 21 Jun 2001 Last revised: 1 Apr 2014

See all articles by Lawrence D. Brown

Lawrence D. Brown

Temple University - Department of Accounting

Kumar N. Sivakumar

Boston University - Department of Accounting

Abstract

Prior research has shown that pro-forma (recurring operating) earnings reported by managers and analysts are more value relevant than GAAP net income. Since GAAP net income contains many non-operating items that reduce its value relevance compared to operating earnings, comparing the value relevance of GAAP net income with operating earnings unduly favors operating earnings. We show that operating earnings reported by managers and analysts are more value relevant than a measure of operating earnings derived from firms' financial statements, as reported by Standard and Poor's. Our evidence is important because it indicates that operating earnings reported by managers and analysts contain value relevant information beyond that provided by operating earnings obtained by sophisticated users from firms' financial statements.

JEL Classification: M41, G12

Suggested Citation

Brown, Lawrence D. and Sivakumar, Kumar N., Comparing the Value Relevance of Two Operating Income Measures. Review of Accounting Studies, Vol. 8, No. 4, 2003. Available at SSRN: https://ssrn.com/abstract=272180 or http://dx.doi.org/10.2139/ssrn.272180

Lawrence D. Brown

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Kumar N. Sivakumar (Contact Author)

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-2035 (Phone)
617-353-6667 (Fax)

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