Do Managers Use Pro Forma Earnings to Exceed Analyst Forecasts?
21 Pages Posted: 12 Nov 2002
Date Written: August 2002
The popular and growing use of issuing 'pro forma' earnings along with GAAP earnings has raised some concerns among regulating bodies such as the SEC and the FASB as well as participants on Wall Street. Some suggest that managers may be excluding small amounts of recurring expenses opportunistically in an attempt to meet benchmarks such as analyst forecasts. We provide evidence suggesting that these concerns are warranted. Specifically, we find that the probability of meeting or beating analyst forecasts increases when managers choose to exclude small expenses from GAAP and report a pro forma earnings number. We also find that the likelihood of just meeting or beating analyst forecasts increases when firms exclude small expenses from their pro forma earnings. These results are robust after controlling for other factors that are known to be associated with exceeding analyst forecasts.
Keywords: pro forma earnings, benchmarks, capital markets, earnings management
JEL Classification: M41, M43, M45
Suggested Citation: Suggested Citation