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

Lougee, Barbara A.; Marquardt, Carol A.

doi:10.2139/ssrn.298363

Cited by 48 publications

(57 citation statements)

References 43 publications

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“…Consistent with the information hypothesis, non-GAAP earnings have been found to be more informative to investors relative to GAAP financial metrics, when GAAP earnings are more subjective (e.g., Bradshaw and Sloan, 2002;Bhattacharya et al, 2003;Brown and Sivakumar, 2003;Lougee and Marquardt, 2004;Choi et al, 2007). Non-GAAP financial metrics are also more predictive of future performance, consistent with these earnings numbers providing a better representation of "core" earnings (Brown and Sivakumar, 2003).…”

Section: Hypothesis Developmentmentioning

confidence: 70%

“…Numerous studies have found evidence supporting this information perspective (i.e., the information hypothesis) of non-GAAP earnings. For instance, Lougee and Marquardt (2004) find that non-GAAP earnings help predict future profitability when a firm's GAAP earnings informativeness is low and that this firm is more likely to report non-GAAP figures. Empirical evidence also suggests that investors consider non-GAAP earnings as a more informative figure (e.g., Bradshaw and Sloan, 2002;Lougee and Marquardt, 2004).…”

Section: Regulatory Setting and Literature Reviewmentioning

confidence: 99%

“…For example, Doyle et al (2003) find that non-GAAP earnings exclusions have predictive ability for future operating earnings and abnormal returns, which indicates that these exclusions may be recurring in the subsequent period. Furthermore, managers seem to use non-GAAP earnings financial metrics to meet or exceed analysts' forecasts (Lougee and Marquardt, 2004;Doyle and Soliman, 2005).…”

Section: Regulatory Setting and Literature Reviewmentioning

confidence: 99%

“…16 Finally, Earnings_Volatility is slightly higher in the Regulation G sample rather than in the C&DIs sample. Lougee and Marquardt (2004) indicate that firms with high earnings volatility (e.g., IT technology and pharmaceutical firms with high R&D) are more likely to be associated with the disclosure of non-GAAP earnings. Table 2 presents a pairwise correlation matrix with the main dependent and independent variables.…”

Section: Mean (Median)mentioning

confidence: 99%

“…The research provides empirical evidence on whether Regulation G and the SEC's issuance of C&DIs have discouraged misleading non-GAAP earnings or encouraged informative non-GAAP earnings. Previous research has documented that non-GAAP earnings both help to inform investors in assessing the firms' core operating performance (e.g., Bradshaw and Sloan, 2002;Brown and Sivakumar, 2003;Bhattacharya et al, 2003;Lougee and Marquardt, 2004;Kolev et al, 2008;Kyung, 2014) but can also mislead investors, thus inflating a firm's equity valuation (e.g., Bradshaw and Sloan, 2002;Doyle et al, 2003;Bhattacharya et al, 2003Bhattacharya et al, , 2004Lougee and Marquardt, 2004;Bowen et al, 2005;Black and Christensen, 2009;Doyle and Soliman, 2009;Brown et al, 2010). Hence, this research adds to a growing body of literature that investigates the consequences of Regulation G and the SEC's C&DIs by examining the impacts of disclosure regulation and interpretive guidance.…”

Section: Introductionmentioning

confidence: 99%

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Market Reaction to Non-GAAP Earnings Around SEC Regulation

et al. 2017

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This paper examines the consequences of the non-GAAP reporting resulting from Regulation G as required by Section 401(b) of the Sarbanes-Oxley Act of 2002 and the SEC's issuance of Compliance & Disclosure Interpretations (C&DIs) in 2010. The paper finds (i) that both Regulation G and C&DIs are associated with an increase in the quality of non-GAAP earnings exclusions, (ii) a decline in the probability of meeting or slightly exceeding analysts' forecasts when firms exclude positive non-GAAP exclusions, and (iii) a reduction in the earnings response coefficients (ERCs) during the post-C&DIs period, but an increase in the post-Regulation G period. This study contributes to the voluntary disclosure literature by providing evidence on whether Regulation G and C&DIs have encouraged informative or opportunistic non-GAAP earnings. Furthermore, this study adds to the regulation literature by highlighting the unintended economic consequences of regulation by regulatory bodies.

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Section: Hypothesis Developmentmentioning

confidence: 70%

Section: Regulatory Setting and Literature Reviewmentioning

confidence: 99%

Section: Regulatory Setting and Literature Reviewmentioning

confidence: 99%

Section: Mean (Median)mentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Market Reaction to Non-GAAP Earnings Around SEC Regulation

et al. 2017

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Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings

Bhattacharya¹,

Black²,

Christensen³

et al. 2003

Journal of Accounting and Economics

466

483

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This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. 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 ARTICLE IN PRESS $We appreciate the valuable research assistance of Rick Mergenthaler, GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of ''core earnings'' than GAAP operating income. r

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A discussion of ‘Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings’

Bradshaw

2003

Journal of Accounting and Economics

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

Cited by 48 publications

References 43 publications

Market Reaction to Non-GAAP Earnings Around SEC Regulation

Market Reaction to Non-GAAP Earnings Around SEC Regulation

Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings

A discussion of ‘Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings’

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