Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and Gaap Operating Earnings

Posted: 1 Dec 2003

See all articles by Neil Bhattacharya

Neil Bhattacharya

Singapore Management University - School of Accountancy; Southern Methodist University (SMU) - Accounting Department

Ervin L. Black

Steed School of Accounting

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Chad R. Larson

University of Houston - Department of Accountancy & Taxation

Multiple version iconThere are 2 versions of this paper

Abstract

This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than standard GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. We document a significant difference between pro forma numbers reported by managers and earnings figures published by I/B/E/S, and conclude that it is problematic to use an income figure reported by I/B/E/S as a proxy for pro forma earnings. Our analyses of short-window abnormal returns and revisions in analysts' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income.

Keywords: pro forma earnings, information content of earnings, persistence of earnings, analysts' forecasts

JEL Classification: G12, G14, G29, M41, M43

Suggested Citation

Bhattacharya, Neil and Black, Ervin L. and Christensen, Theodore E. and Larson, Chad Russell, Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and Gaap Operating Earnings. Journal of Accounting & Economics, Vol. 36, Nos. 1-3, pp. 285-319, December 2003. Available at SSRN: https://ssrn.com/abstract=472963

Neil Bhattacharya

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3082 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://www.cox.smu.edu

Ervin L. Black

Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-2401 (Phone)

Theodore E. Christensen (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Chad Russell Larson

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

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