Are Investors Misled by 'Pro Forma' Earnings?

36 Pages Posted: 8 Jan 2002

See all articles by W. Bruce Johnson

W. Bruce Johnson

University of Iowa - Department of Accounting

William C. Schwartz

University of Arizona - Department of Accounting


This paper uses stock market data to investigate the popular claim the investors are misled by the "pro forma" earnings numbers conspicuously featured in the press releases of some U.S. firms. We first document the frequency and magnitude of pro forma earnings in press releases issued during June through August 2000, and describe the 433 firms that engaged in this financial disclosure strategy. Our test period predates public expressions of concern by trade associations and regulators that pro forma earnings may mislead investors, and the subsequent issuance of guidelines and rules on the disclosure of pro forma earnings numbers. We use two complementary approaches to determine if the share prices investors assign to pro forma firms are systematically higher than the prices assigned to other firms. Our market multiples tests for differences in price levels find some evidence suggesting that pro forma firms may be priced higher than are firms that do not use the disclosure strategy. However, this apparent over-pricing is not related to the pro forma earnings numbers themselves. Our narrow-window stock returns tests reveal no evidence of a stock return premium for pro forma firms at the quarterly earnings announcement date. Collectively, the results cast doubt on the notion that investors are, on average, misled by pro forma earnings disclosures despite the widespread concern expressed in the financial press and by regulators.

Keywords: Pro Forma, Earnings, Disclosure Strategies, Prices

JEL Classification: M40, M41, M45, G12, G14

Suggested Citation

Johnson, W. Bruce and Schwartz, William Carleton, Are Investors Misled by 'Pro Forma' Earnings?. Contemporary Accounting Research, Vol. 24, No. 4, Winter 2005, Available at SSRN: or

W. Bruce Johnson (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-1048 (Phone)
319-335-1956 (Fax)

William Carleton Schwartz

University of Arizona - Department of Accounting ( email )

McClelland Hall 301 P.O. Box 210108
Tucson, AZ 85721
United States
520-621-4830 (Phone)
520-621-3742 (Fax)

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