Press Release Disclosure of ‘Pro Forma’ Earnings Metrics by Large German Corporations -- Empirical Evidence and Regulatory Recommendations

This paper is set against the background of recent regulatory action and standard-setting activities pertaining to the disclosure of so-called ‘pro forma’ earnings. For a sample of large corporations listed on the Frankfurt stock exchange, I individually analyze quarterly earnings announcements published for the fiscal years 2005 and 2006. Given voiced concern about the potential of pro forma metrics to misrepresent firm performance and thus to potentially mislead investors, research questions pertain to the use, the calculation and the presentation of pro forma earnings, and the impact of recent recommendations issued by European securities commissions. The results indicate that firms make extensive use of so-called ‘EB’ (earnings before) metrics and, more importantly, of pure non-GAAP performance measures, both in terms of frequency and reporting emphasis. The transparency of adjustments to GAAP earnings turns out to be low. Year-to-year analysis suggests that recent recommendations by European securities regulators have had no discernible impact on these disclosure patterns. Taken together, this evidence suggests that regulatory concern may be warranted. At the same time, it points out the need for more research into the determinants and the investor reception of pro forma earnings disclosures in EU jurisdictions.