Earnings Informativeness and Strategic Disclosure: An Empirical Examination of 'Pro Forma' Earnings

Posted: 5 Mar 2004

See all articles by Barbara A. Lougee

Barbara A. Lougee

University of San Diego School of Business

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Abstract

This paper provides evidence on the characteristics of firms that include pro forma earnings information in their press releases, whether the usefulness of pro forma earnings to investors varies systematically with these characteristics, and whether the investor response to pro forma earnings is consistent with market efficiency or mispricing. Using a sample of 249 press releases from 1997-99, we find that firms with low GAAP earnings informativeness are more likely to disclose pro forma earnings than other firms. We also find that strategic considerations, measured using the direction of GAAP earnings surprises, are an important determinant of pro forma reporting. In addition, our examination of the relative and incremental information content of pro forma earnings shows that investors find pro forma earnings to be more useful when GAAP earnings informativeness is low or when strategic considerations are absent. Tests of the predictive ability of pro forma earnings for future profitability and returns are mixed, and we therefore cannot conclusively determine whether the investor reaction to pro forma earnings at the time of the press release is consistent with market efficiency or mispricing. 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 informativeness, strategic disclosure, relative and incremental information content, market efficiency

JEL Classification: M41, M45, G12, G14

Suggested Citation

Lougee, Barbara and Marquardt, Carol, Earnings Informativeness and Strategic Disclosure: An Empirical Examination of 'Pro Forma' Earnings. Accounting Review, July 2004. Available at SSRN: https://ssrn.com/abstract=503862

Barbara Lougee

University of San Diego School of Business ( email )

227 Coronado Hall
5998 Alcalá Park
San Diego, CA
United States
619.260.7892 (Phone)
619.260.7725 (Fax)

Carol Marquardt (Contact Author)

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

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