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The Presentation Arrangements of Pro Forma Earnings Disclosures: Managerial Incentives and Market Responses

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  • Guannan Wang

Abstract

This study examines whether the presentation of pro forma earnings disclosures within earnings announcements reflects managerial incentives, as well as the impact of these presentation decisions on equity market pricing of earnings. Using hand-collected data, I measure “presentation†along two dimensions- emphasis of pro forma earnings within the earnings announcement, and the display format of earnings. Consistent with expectations, I document three empirical regularities. First, these presentation decisions appear to reflect managerial opportunism, such as the desire to beat benchmark earnings. Second, these decisions affect the market reaction to disclosed earnings. Finally, implementation of Regulation G, which mandated improved reconciliation of pro forma earnings to GAAP earnings, reduces both opportunistic presentation as well as the influence of presentation arrangements over investors’ decision making. Overall, the results suggest that presentation of pro forma earnings also reflects managerial incentives and market pricing, and that regulatory efforts to mitigate these effects have been successful.

Suggested Citation

  • Guannan Wang, 2014. "The Presentation Arrangements of Pro Forma Earnings Disclosures: Managerial Incentives and Market Responses," Accounting and Finance Research, Sciedu Press, vol. 3(3), pages 1-27, August.
    • Handle: RePEc:jfr:afr111:v:3:y:2014:i:3:p:27
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    References listed on IDEAS

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    1. Edward J. Riedl & Suraj Srinivasan, 2010. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 289-332, March.
    2. Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E. & Larson, Chad R., 2003. "Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 285-319, December.
    3. Edward J. Riedl & Suraj Srinivasan, 2010. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 8-8, March.
    4. Allee, Kristian D. & Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E., 2007. "Pro forma disclosure and investor sophistication: External validation of experimental evidence using archival data," Accounting, Organizations and Society, Elsevier, vol. 32(3), pages 201-222, April.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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