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

Lougee, Barbara A.; Marquardt, Carol A.

doi:10.2308/accr.2004.79.3.769

Cited by 400 publications

(377 citation statements)

References 30 publications

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“…As "cash flows are potentially less subjective than accruals…(they) help market participants assess firm viability by providing information about solvency and liquidity (Defond and Hung, 2003, p. 75). Also, the complementary information in cash flows is consistent with the evidence that investors may not comprehend fully the information presented in earnings and are subsequently surprised when non-recurring items recur in subsequent years, or when pro forma earnings miss earnings benchmarks (McVay, 2006;Lougee and Marquardt, 2004). If earnings measures that are less conservative than GAAP earnings can be used to mislead investors or are susceptible to earnings management, it is conceivable that more conservative earnings measures may have information content (Basu, 1997; Givoly and Hayn, 2000;Ryan and Zarowin, 2003).…”

supporting

confidence: 56%

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Comparative Value-Relevance of GAAP, IBES, S&P Core, Cash Earnings and Cash Flows

et al. 2013

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This study examines the impact the global financial crisis had on the value relevance of GAAP and non-GAAP earnings. We adopt the Ohlson (1995) valuation and CAR models to test the value relevance and information content of alternative earnings measures. We use six different earnings measures comprising IBES earnings, Standard & Poor's (S&P) core earnings, cash earnings, cash flows from operations, earnings from operations adjusted to exclude special items under GAAP and income before extraordinary items under GAAP. We draw our sample from US publicly traded firms between 2002 and 2010. Our sample is partitioned into Financial and non-Financial firms, and S&P 500 and non-S&P 500 firms. The results show that investors place greater value relevance on GAAP earnings during the GFC period relative to the pre-GFC period. INTRODUCTIONThere is much research on the information content and value relevance of earnings measures based on generally accepted accounting principles (GAAP) relative to non-GAAP measures.Prior research (Bradshaw and Sloan, 2002; Bhattacharya et al., 2003; Doyle et al., 2003;Lougee and Marquardt, 2004) finds that non-GAAP earnings (e.g., street, pro forma or IBES earnings) are significantly more value relevant and informative relative to GAAP earnings.Much of this evidence, however, is based on samples from before 2006, i.e., before the global financial crisis (GFC). Consequently, these studies do not investigate the impact of the GFC on the value relevance or informativeness of non-GAAP earnings relative to GAAP earnings. Albring et al. (2010), however, covers the period 2002 to 2007 in their study, which includes the beginning of the GFC. Nevertheless, they did not investigate the impact of the GFC. To the best of our knowledge, there is no research on the value relevance of these earnings metrics post-2006 after the GFC, during which period there is increased focus on the reliability of earnings information. Further, the GFC has created a climate of volatility and uncertainty in the capital market that may impact on how investors perceive the credibility and value relevance of earnings, and the sources from which they are produced. Prior to the GFC, there had been concerns with pro forma earnings, specifically with the quality of the information and the potential for it to be biased given management's vested interests. This led to the Securities and Exchange Commission (SEC) instituting regulations limiting the use of non-GAAP earnings metrics (SEC, 2001; SEC, 2002 Generally, pro forma earnings are produced by firms to supplement their reported GAAP earnings, while street and IBES earnings are produced by analysts. Non-GAAP earnings are generally more selective than GAAP earnings in that "other non-operating" items are excluded and these earnings are argued to better represent continuing performance. Bowen et al. (2005) provide evidence that firms tend to place greater relative emphasis on pro forma earnings when they have less value relevant GAAP earnings. Bhattacharya et al. (2003)...

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confidence: 56%

“…Prior research (Bradshaw and Sloan, 2002; Bhattacharya et al, 2003; Doyle et al, 2003;Lougee and Marquardt, 2004) finds that non-GAAP earnings (e.g., street, pro forma or IBES earnings) are significantly more value relevant and informative relative to GAAP earnings.…”

Section: Introductionmentioning

confidence: 99%

Comparative Value-Relevance of GAAP, IBES, S&P Core, Cash Earnings and Cash Flows

et al. 2013

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“…Basing this study on narratives in press releases represents an opportunity to extend research findings to a new communications format. While there has been a small number of studies of disclosures in press releases in the US (e.g., Lougee and Marquardt, 2004;Bowen et al, 2005;Johnson and Schwartz, 2005;Davis et al, 2007;Henry, 2008), this is the first study of disclosures in press releases in another country. Press releases are important disclosure vehicles given their subsequent influence on, and even inclusion in, media outlets resulting in wider dissemination of their content compared with the content of annual reports.…”

Section: Objectives and Contribution Of The Papermentioning

confidence: 99%

Impression Management: Developing and Illustrating a Scheme of Analysis for Narrative Disclosures - A Methodological Note

2008

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Publication informationAccounting, Auditing and Accountability Journal, 22 (5) disclosures. An impression management bias score is devised to capture the extent to which impression management introduces bias into corporate narratives. An example of the application of the composite impression management score and impression management bias score methodology is provided.Findings -While not amounting to systematic evidence, the 21 illustrative examples suggest that impression management is pervasive in corporate financial communications using multiple impression management methods, such that positive information is exaggerated, while negative information is either ignored or is underplayed.Originality/value -Four impression management methods are described in detail, illustrated by 21 examples. These four methods are examined together. New impression management methods are studied in this paper for the first time. This paper extends prior impression management measures in two ways. First, a composite impression management score based on four impression management techniques is articulated. Second, the composite impression management score methodology is extended to capture a measure for bias, in the form of an impression management bias score. This is the first time outside the US that narrative disclosures in press releases have been studied.

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“…Findings of archival empirical research support the (additional) information (e.g., Bhattacharya et al, 2003;Lougee and Marquardt, 2004) and the strategic reporting hypotheses (Bhattacharya et al, 2004;Entwistle et al, 2006). As management's true motivation cannot be observed though, both motives are hard to disentangle empirically (Entwistle et al, 2006).…”

Section: The Example Of Pro Forma Earnings Disclosurementioning

confidence: 69%

Testing vs. building accounting theory with experimental research: insights from management research

Reimsbach

Hauschild

2015

IJBAF

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With this conceptual paper, we want to raise scholars' awareness of the underused potential of experiments in accounting research. We refer to research taxonomies from the management discipline to explore the role of experimental research in testing and building accounting theory. Although the contribution of laboratory research to testing theory is well acknowledged, we argue that exploratory experimental research efforts also have the potential to build new theory, pointing at the underused potential of experiments in current accounting research. In doing so, we (i) provide a clear understanding of theory building and theory testing in accounting research; (ii) present a guideline for assessing the degree of theory building and theory testing inherent in any (experimental) study. Furthermore, we argue that an inter-study triangulation aligning experimental and archival methodologies will have the potential to produce results that are robust to internal and external validity concerns, thus advancing accounting theory.

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

Cited by 400 publications

References 30 publications

Comparative Value-Relevance of GAAP, IBES, S&P Core, Cash Earnings and Cash Flows

Comparative Value-Relevance of GAAP, IBES, S&P Core, Cash Earnings and Cash Flows

Impression Management: Developing and Illustrating a Scheme of Analysis for Narrative Disclosures - A Methodological Note

Testing vs. building accounting theory with experimental research: insights from management research

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