Empirical Evidence on Recent Trends in Pro Forma Reporting

Bhattacharya, Nilabhra; Black, Ervin L.; Christensen, Theodore E.; Mergenthaler, Richard

doi:10.2308/acch.2004.18.1.27

Cited by 164 publications

(115 citation statements)

References 9 publications

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“…Although evidence is found for the strategic use of alternative performance measures (e.g. Doyle and Soliman, 2002;Bhattacharya et al, 2004;Lougee and Marquardt, 2004;Bowen et al, 2005;Entwistle et al, 2005;Black and Christensen, 2009;Doyle et al, 2013), results suggest that reported alternative performance measures are relevant for investor decisionmaking (e.g. Bhattacharya et al, 2003;Brown and Sivakumar, 2003;Lougee and Marquardt, 2004) and provide incremental information beyond the net income number alone.…”

Section: Other Disaggregations Of Earningsmentioning

confidence: 83%

Does the New Conceptual Framework Provide Adequate Concepts for Reporting Relevant Information about Performance?

Brouwer

Faramarzi

Hoogendoorn

2014

Accounting in Europe

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The basic question we raise in this paper is whether the 2013 Discussion Paper (DP 2013) on the Conceptual Framework provides adequate principles for reporting an entity's performance and what improvements could be made in the light of both user needs and evidence from academic literature. DP 2013 proposes to continue applying a balance sheet approach to financial accounting, whereby the income statement serves as a statement explaining changes in an entity's financial position. Performance is reduced to a discussion of possible approaches to defining other comprehensive income items and recycling. We conclude that the literature supports a more refined approach to communicating relevant attributes of performance, defining performance independently from assets and liabilities and taking into account various relevant disaggregations within profit or loss. We therefore propose a more balanced approach to financial reporting whereby the balance sheet and income statement are treated as equally important and the income statement gives more information about various relevant attributes of performance.

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Section: Other Disaggregations Of Earningsmentioning

confidence: 83%

Does the New Conceptual Framework Provide Adequate Concepts for Reporting Relevant Information about Performance?

Brouwer

Faramarzi

Hoogendoorn

2014

Accounting in Europe

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“…8 Several studies argue that managers can use non-GAAP earnings opportunistically to increase equity valuations or garner private benefits. For example, Bhattacharya et al (2004) find that the use of non-GAAP earnings increases dramatically when the earnings and stock prices of the respective firms start to decline. Bowen et al (2005) look at the strategic emphasis managers place on non-GAAP earnings and find that managers tend to emphasize the metric that portrays better firm performance.…”

Section: Non-gaap Earnings and Board Independencementioning

confidence: 97%

“…First, prior research finds that non-GAAP earnings are used both (1) to inform equity investors (e.g., Bradshaw and Sloan 2002;Brown and Sivakumar 2003;Bhattacharya et al 2003;Lougee and Marquardt 2004) and (2) to opportunistically mislead them (e.g., Bradshaw and Sloan 2002;Doyle et al 2003;Bhattacharya et al 2003;Lougee and Marquardt 2004;Bhattacharya et al 2004;Bowen et al 2005;Black and Christensen 2009;Doyle and Soliman 2009;Brown et al 2010). Rather than attempting to distinguish between these alternatives, which need not be mutually exclusive, we provide evidence on cross-sectional variation in opportunism by examining how the nature of the exclusions (recurring versus transitory) and their use to meet the analyst forecast vary with board independence.…”

Section: Introductionmentioning

confidence: 99%

“…Managers sometimes choose to voluntarily disclose non-GAAP earnings in their press releases, determining the exclusions at their own discretion. Since non-GAAP earnings numbers disclosed in press releases are not subject to audit, opportunism can affect managers' exclusion choices (Doyle et al 2003;Bowen et al 2005;Black and Christensen 2009), and the nature of exclusions varies substantially both across firms and across quarters of the same firm (Bhattacharya et al 2004). 1 Prior research indicates, however, that non-GAAP earnings are more persistent than GAAP earnings (Bhattacharya et al 2003), and firms tend to disclose non-GAAP earnings when GAAP earnings are less informative (Lougee and Marquardt 2004), suggesting that core-earnings disclosures aid investors in predicting future earnings despite the voluntary and discretionary nature of non-GAAP earnings.…”

Section: Introductionmentioning

confidence: 99%

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Non-GAAP earnings and board independence

2011

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We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings.

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“…This sample extends Bhattacharya et al's (2007) sample and is similar to Brown et al's (2012) sample. We begin our hand collection in 1998 Q1 since manager‐adjusted pro forma earnings were not widely reported in the US prior to 1998 (see Bhattacharya et al, 2004, for a detailed analysis of time trends in pro forma reporting). Table 1 summarizes our sample selection procedures.…”

Section: Sample Selection Variable Measurement and Descriptive Ementioning

confidence: 99%

The Timing of Quarterly ‘Pro Forma’ Earnings Announcements

Brown

Christensen

Elliott

2012

Business Fin & Account

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While some prior studies suggest that the timing of earnings announcements may reflect management's attempt to better inform investors, other studies suggest that managers opportunistically time their earnings releases in an effort to alter investors’ perceptions of firm performance. However, there is limited empirical evidence on the relation between earnings announcement timing and the manipulation of reported earnings. We extend this research by examining the timing of quarterly earnings announcements that contain an adjusted (‘pro forma’) earnings measure and whether managers’ behavior is more consistent with opportunistic or information‐related motives. We find that, on average, managers accelerate the timing of earnings announcements in quarters in which they disclose an adjusted earnings metric within the earnings press release relative to quarters in which they do not. In addition, we find that the acceleration of the earnings announcement increases with the level of managers’ exclusions of recurring expenses and their use of less transparent reconciliation formats. Consistent with managerial opportunism, we find that the recurring item exclusions used to calculate pro forma earnings in accelerated earnings announcements are of relatively lower quality and are more predictive of lower future earnings. We also find that investors fail to fully unravel the low‐quality nature of the recurring item exclusions used to calculate pro forma earnings in these accelerated announcements and that this failure is attenuated by managers’ use of less transparent reconciliation formats. Taken together, our results suggest that the acceleration of pro forma earnings news is at least partially attributable to managerial opportunism.

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Empirical Evidence on Recent Trends in Pro Forma Reporting

Cited by 164 publications

References 9 publications

Does the New Conceptual Framework Provide Adequate Concepts for Reporting Relevant Information about Performance?

Does the New Conceptual Framework Provide Adequate Concepts for Reporting Relevant Information about Performance?

Non-GAAP earnings and board independence

The Timing of Quarterly ‘Pro Forma’ Earnings Announcements

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