Earnings Quality and Strategic Disclosure: An Empirical Examination of 'Pro Forma' Earnings

39 Pages Posted: 5 Feb 2002

See all articles by Barbara A. Lougee

Barbara A. Lougee

University of San Diego School of Business

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Date Written: August 2002

Abstract

This paper provides evidence on the characteristics of firms that include pro forma earnings information in their press releases and on whether the usefulness of pro forma earnings to investors varies systematically with these characteristics. Using a sample of 249 press releases from 1997-99, we find that firms with low GAAP earnings quality, as measured by the earnings-return correlation and its related R2, are more likely to disclose pro forma earnings than other firms. In addition, firms that engage in pro forma reporting are concentrated in high-technology industries, have greater sales growth and greater earnings variability, and are more likely to have negative earnings surprises than other firms. We also report significantly greater relative and incremental information content of pro forma earnings over GAAP earnings when GAAP earnings quality is low and when strategic considerations (as measured by the direction of the earnings surprise) are absent. Pro forma earnings also have significant predictive ability for future operating performance and returns in these instances, which is consistent with the view that managers are releasing pro forma figures in order to enhance the information environment in these particular cases. The paper contributes to the growing literature on pro forma earnings and more generally to the literature on voluntary and strategic disclosure.

Keywords: Pro forma earnings; Earnings quality; Strategic disclosure; Relative and incremental information content

JEL Classification: M41, M45, G14

Suggested Citation

Lougee, Barbara and Marquardt, Carol, Earnings Quality and Strategic Disclosure: An Empirical Examination of 'Pro Forma' Earnings (August 2002). Available at SSRN: https://ssrn.com/abstract=298363 or http://dx.doi.org/10.2139/ssrn.298363

Barbara Lougee

University of San Diego School of Business ( email )

227 Coronado Hall
5998 Alcalá Park
San Diego, CA
United States
619.260.7892 (Phone)
619.260.7725 (Fax)

Carol Marquardt (Contact Author)

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

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