Earnings Quality and Strategic Disclosure: An Empirical Examination of 'Pro Forma' Earnings
39 Pages Posted: 5 Feb 2002
Date Written: August 2002
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: Suggested Citation