Empirical Evidence on Recent Trends in Pro Forma Reporting

Posted: 19 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

Richard Mergenthaler

The University of Arizona - Eller College of Management

Multiple version iconThere are 2 versions of this paper

Abstract

This study provides descriptive evidence on the controversial trend adopted by many firms in recent years of reporting earnings figures on a "pro forma" basis. Pro forma earnings exclude normal income statement items that managers deem to be nonrecurring or nonrepresentative of ongoing operations. We investigate various aspects of pro forma disclosure practice by examining a large sample of actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers tend to be relatively "young" firms that are concentrated primarily in the tech sector and business services industries. We also find that pro forma firms are significantly less profitable, more liquid, and have higher debt levels, P-E ratios, and book-to-market ratios than other firms in their own industries. Our results indicate that while firms commonly exclude multiple expenses in arriving at their pro forma earnings figure, they usually do not exclude the same items in subsequent pro forma announcements. We further find that pro forma announcers' earnings and sales are generally below market averages during our observation period. Interestingly, we also observe that the frequency of pro forma announcements appears to have exploded precisely when earnings and prices of these firms started to decline. Finally, our data provide evidence consistent with the criticism that pro forma announcements may often be motivated by managers' desires to meet or beat analysts' expectations or to avoid earnings decreases.

Keywords: pro forma earnings, street earnings, corporate disclosure, analysts' expectations

JEL Classification: G14, G29, M41, M43, M45, M47

Suggested Citation

Bhattacharya, Neil and Black, Ervin L. and Christensen, Theodore E. and Mergenthaler, Richard Dean, Empirical Evidence on Recent Trends in Pro Forma Reporting. Accounting Horizons, Vol. 18, No. 1, 2004. Available at SSRN: https://ssrn.com/abstract=475900

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

Richard Dean Mergenthaler

The University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-621-2929 (Phone)
520-621-3742 (Fax)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/rick-mergenthaler

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