Are Investors Influenced by Pro Forma Emphasis and Reconciliations in Earnings Announcements?

35 Pages Posted: 9 Feb 2004

See all articles by W. Brooke Elliott

W. Brooke Elliott

University of Illinois at Urbana-Champaign

Abstract

This study presents the results of an experiment that examines how two underlying characteristics of pro forma earnings announcements, pro forma emphasis and the presence of a quantitative reconciliation, influence non-professional investors' and analysts' reliance on pro forma disclosures. The results indicate that the emphasis management places on pro forma earnings, not the mere presence of pro forma earnings, influences non-professional investors' judgments and decisions, but that this influence is mitigated by the presence of a quantitative reconciliation. Further analysis reveals that the influence of pro forma emphasis on nonprofessional investors' judgments and decisions seems to be the result of an unintentional cognitive effect as opposed to the perceived informativeness of the earnings figure emphasized by management. Analysts' judgments and decisions were also affected by the presence of reconciliation, but in the opposite direction to those of nonprofessional investors. Specifically, the presence of a quantitative reconciliation led analysts to view pro forma earnings as more reliable, increasing their reliance on the pro forma disclosure in judging the earnings performance of the firm.

Keywords: Analysts, non-professional investors, pro forma earnings, reconciliations

JEL Classification: G29, M41, M45

Suggested Citation

Elliott, W. Brooke, Are Investors Influenced by Pro Forma Emphasis and Reconciliations in Earnings Announcements? . Available at SSRN: https://ssrn.com/abstract=497548 or http://dx.doi.org/10.2139/ssrn.497548

W. Brooke Elliott (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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