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Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation

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  • Wayne R. Landsman
  • Bruce L. Miller
  • Shu Yeh

Abstract

This study addresses three research questions relating to total exclusions, special items, and other exclusions. Are each of these pro forma exclusion components forecasting irrelevant? Are each of the exclusion components value irrelevant? Are the valuation multiples on the exclusion components justified by their ability to forecast future profitability as predicted by the Ohlson (1999) model? Findings are generally consistent with the market‐inefficiency results presented in Doyle et al. (2003). Total exclusions are valued negatively by the market despite the prediction that total exclusions will be valued positively. Valuation results also suggest that stocks with positive other exclusions are overpriced.

Suggested Citation

  • Wayne R. Landsman & Bruce L. Miller & Shu Yeh, 2007. "Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 650-675, April.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:3-4:p:650-675
    DOI: 10.1111/j.1468-5957.2007.02033.x
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    2. Florian Meier, 2020. "The Age of Cheap Money and Passive Investing: Are Pro Forma Earnings Value Relevant?," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 9(2), pages 1-1.
    3. Okun Omokhoje Omokhudu & Peter Okoeguale Ibadin, 2015. "Incremental Value Relevance of Disaggregated Book Values and Disaggregated Earnings: Evidence from Nigeria," Accounting and Finance Research, Sciedu Press, vol. 4(4), pages 176-176, November.
    4. Claudia Arena & Simona Catuogno & Nicola Moscariello, 2021. "The unusual debate on non-GAAP reporting in the current standard practice. The lens of corporate governance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(3), pages 655-684, September.
    5. Aubert, François & Grudnitski, Gary, 2014. "The role of reconciliation quality in limiting mispricing of non-GAAP earnings announcements by EURO STOXX firms," Advances in accounting, Elsevier, vol. 30(1), pages 154-167.
    6. Karola Bastini & Rainer Kasperzak, 2013. "Erkenntnisfortschritt in der Rechnungslegung durch experimentelle Forschung? — Diskussion methodischer Grundsatzfragen anhand der Entscheidungsnützlichkeit des Performance Reporting," Schmalenbach Journal of Business Research, Springer, vol. 65(7), pages 622-660, December.
    7. Sascha B. Herr & Peter Lorson & Jochen Pilhofer, 2022. "Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals," Schmalenbach Journal of Business Research, Springer, vol. 74(3), pages 389-451, September.
    8. Barth, Mary E. & Gow, Ian D. & Taylor, Daniel J., 2010. "Non-GAAP and Street Earnings: Evidence from SFAS 123R," Research Papers 2064, Stanford University, Graduate School of Business.
    9. Steven Young, 2014. "The drivers, consequences and policy implications of non-GAAP earnings reporting," Accounting and Business Research, Taylor & Francis Journals, vol. 44(4), pages 444-465, August.
    10. Irene Karamanou, 2007. "Discussion of Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 676-679, April.
    11. Qianyun Huang & Terrance R. Skantz, 2016. "The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements," Review of Accounting Studies, Springer, vol. 21(1), pages 198-250, March.
    12. Greg Clinch & Ann Tarca & Marvin Wee, 2023. "Cross‐country diversity and non‐IFRS financial performance measures," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2473-2502, June.
    13. Venter, Elmar R. & Cahan, Steven F. & Emanuel, David, 2013. "Mandatory Earnings Disaggregation and the Persistence and Pricing of Earnings Components," The International Journal of Accounting, Elsevier, vol. 48(1), pages 26-53.
    14. Dirk E. Black & Theodore E. Christensen, 2009. "US Managers' Use of ‘Pro Forma’ Adjustments to Meet Strategic Earnings Targets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 297-326, April.

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