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Journal of Undergraduate Research

Keywords

earnings adjustments, financial analysts, pro forma earnings

College

Marriott School of Management

Department

Accountancy

Abstract

Pro forma reporting has received significant attention from managers, regulators, and researchers in recent years. Pro forma reporting occurs when managers adjust earnings for certain “one-time” items allegedly to present earnings that are more representative of the “core” operations of their firms. In addition, analysts make adjustments to reported earnings to arrive at earnings per share estimates. Prior research has examined various aspects of pro forma reporting. Bhattacharya, et al., 2006 and Frederickson and Miller, 2004 find that investment decisions of ordinary, retail investors are affected by pro forma earnings while those of professional investors are not. Different proxies exist for pro forma, or non-GAAP, earnings. Bradshaw and Sloan, 2002 find that “street earnings” (earnings from analysts) have greater information content than GAAP earnings. Bhattacharya, et al, 2003 find that manager-adjusted earnings (pro forma) have more information content than GAAP operating earnings. Another important part of the pro forma earnings research involves the effects of government regulation. Entwistle, et al., 2006, find that the frequency of pro forma earnings disclosures decreased from 2001 to 2003 in their sample of S&P 500 firms.

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