This article explores whether pro forma earnings, GAAP earnings, and I/B/E/S earnings are value relevant and, more important, which in comparative terms has the greatest value relevance. In addition to using actual pro forma measures contained in earnings press releases of Standard and Poor's (S&P) 500 firms, our design employs both traditional price and returns association models and incorporates both current and future measures of earnings. We find for the full period, 2000 through 2004, that all three earnings measures are value relevant. We further find that pro forma earnings are significantly more value relevant than Institutional Broker's Estimate System (I/B/E/S) earnings, which in turn are more value relevant than Generally Accepted Accounting Principles (GAAP) earnings. These results are robust to several alternate model specifications as well as to controlling for measures of opportunistic reporting.
BallR.WattsR.. 1972. “Some Time Series Properties of Accounting Income”. Journal of Finance, 27 (June): 663–681.
2.
BallR.KothariS. P.WattsR. L.. 1993. “Economic Determinants of the Relation between Earnings Changes and Stock Returns”. The Accounting Review, 68 (July): 622–638.
3.
BarthM. E.BeaverW. H.LandsmanW. R.. 1992. “The Market Valuation Implications of Net Periodic Pension Cost”. Journal of Accounting and Economics (March): 27–62.
4.
BarthM. E.ElliottJ. A.FinnM. W.. 1999. “Market Rewards Associated with Patterns of Increasing Earnings”. Journal of Accounting Research, 37 (Autumn): 387–413.
5.
BarthM. E.ClementM. B.FosterG.KasznikR.. 2003. “Brand Values and Capital Market Valuation”. In Intangible Assets: Values, Measures and Risks, edited by HandJ.LevB., 153–184. London: Oxford University Press.
6.
BasuS.1997. “The Conservatism Principle and the Asymmetric Timeliness of Earnings”. Journal of Accounting and Economics, 24 (December): 3–37.
7.
BeaverW.1968. “The Information Content of Annual Earnings Announcements”. Journal of Accounting Research, 6 (Supplement): 67–92.
8.
BeaverW.1970. “The Time Series Behavior of Earnings”. Journal of Accounting Research, 8: 62–69.
BeaverW.McNicholsM.PriceR.. 2007. “Delisting Returns and Their Effect on Accounting-Based Market Anomalies”. Journal of Accounting and Economics, 43 (July): 341–368.
11.
BhattacharyaN.BlackE. L.ChristensenT. E.LarsonC. R.. 2003. “Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and GAAP Operating Earnings”. Journal of Accounting and Economics, 36 (December): 285–319.
12.
BhattacharyaN.BlackE. L.ChristensenT. E.MergenthalerR. D.. 2004. “Empirical Evidence on Trends in Pro Forma Reporting”. Accounting Horizons, 18: 27–43.
13.
BhattacharyaN.BlackE. L.ChristensenT. E.MergenthalerR. D.. 2007. “Who Trades on Pro Forma Earnings Information?”The Accounting Review, 82 (May): 581–619.
BiddleG. C.BowenR. M.WallaceJ. S.. 1997. “Does EVA Beat Earnings? Evidence on Associations with Stock Returns and Firm Values”. Journal of Accounting and Economics, 24 (December): 301–336.
16.
BlackD. E.BlackE. L.ChristensenT. E.WaegeleinJ. F.. 2008. “The Effects of Executive Compensation Contracts and Auditor Effort on Firms' Pro Forma Reporting Decisions”. Working paper, Brigham Young University.
17.
BloomfieldR.LibbyR.. 1996. “Market Reactions to Differentially Available Information in the Laboratory”. Journal of Accounting Research, 34 (Autumn): 183–207.
18.
BowenR. M.DavisA. K.MatsumotoD. A.. 2005. “Emphasis on Pro Forma versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC Intervention, and Market Reactions”. The Accounting Review, 80 (4): 1011–1038.
19.
BradshawM. T.SloanR. G.. 2002. “GAAP versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings”. Journal of Accounting Research, 40 (March): 41–66.
20.
BrayC.2001. “SEC Looking at Pro Forma Earnings with ‘Purpose in Mind.’”Dow Jones News-wires, November 8.
21.
BrownC.ChristensenT. E.ElliottW. B.MergenthalerR. D.. 2008. “Do Managers Use Pro Forma Earnings Disclosures to Cater to Investor Sentiment?” Working paper, University of Southern California.
22.
BrownL. D.SivakumarK.. 2003. “Comparing the Value Relevance of Two Operating Income Measures”. Review of Accounting Studies, 8 (December): 561–572.
23.
BurgstahlerD.EamesM. L.. 2003. “Earnings Management to Avoid Losses and Earnings Decreases: Are Analysts Fooled?”Contemporary Accounting Research, 20 (Summer): 253–272.
24.
CampbellL. W.PitmanK. M.. 2007. “Post-Regulation G: Non-GAAP Reporting”. Working paper, University of Texas at San Antonio.
25.
ChristieA.1987. “On Cross-Sectional Analysis in Accounting Research”. Journal of Accounting and Economics, 9 (December): 231–258.
26.
CollinsD. W.KothariS. P.ShankenJ.SloanR. G.. 1994. “The Lack of Timeliness and Noise as Explanations for the Low Contemporaneous Returns-Earnings Association”. Journal of Accounting and Economics, 18 (November): 289–324.
27.
DegeorgePatelF.J.ZeckhauserR.. 1999. “Earnings Management to Exceed Thresholds”. Journal of Business, 72 (January): 1–33.
28.
DerbyM. S.2001. “Investors Getting More Data, but Is it the Right Data?”Dow Jones Newswires, September 3.
29.
DiamondD.W.1985. “Optimal Release of Information by Firms”. Journal of Finance, 40 (September): 1071–1094.
30.
DiamondD. W.VerrecchiaR. E.. 1981. “Information Aggregation in a Noisy Rational Expectations Economy”. Journal of Financial Economics, 9 (September): 221–235.
31.
DichevI. D.SkinnerD. J.. 2002. “Large-Sample Evidence on the Debt Covenant Hypothesis”. Journal of Accounting Research, 40 (September): 1091–1123.
32.
DoyleJ. T.LundholmR. J.SolimanM. T.. 2003. “The Predictive Value of Expenses Excluded from Pro Forma Earnings”. Review of Accounting Studies, 8 (June): 145–174.
33.
DoyleJ.SolimanM. T.. 2005. “Do Managers Define ‘Street’ Earnings to Meet or Beat Analyst Forecasts?” Working paper, Stanford University.
34.
DremanD.2001. “Fantasy Earnings”. Forbes, October 1: 134.
35.
DyeR.1985. “Disclosure of Nonproprietary Information”. Journal of Accounting Research, 23 (Spring): 123–145.
36.
ElsteinA.2001. “Waste Management Excludes Some Expenses in Accounting”. The Wall Street Journal, August 23.
37.
EntwistleG. M.FelthamG. D.MbagwuC.. 2006. “Financial Reporting Regulation and the Reporting of Pro Forma Earnings”. Accounting Horizons, 20 (March): 39–55.
38.
EttredgeM.KwonS.SmithD.ZarowinP.. 2005. “The Impact of SFAS NO. 131 Business Segment Data on the Market's Ability to Anticipate Future Earnings”. The Accounting Review, 80 (July): 773–804.
FrankelR. M.RoychowdhuryS.. 2007. “Predicted Asymmetric Timeliness and the Persistence of Special Items”. Working paper, Washington University and Massachusetts Institute of Technology.
41.
GelbD. S.ZarowinP.. 2002. “Corporate Disclosure Policy and the Informativeness of Stock Prices”. Review of Accounting Studies, 7 (March): 33–52.
42.
GoreJ. P.PopeP. F.SinghA.. 2007. “Earnings Management and the Distribution of Earnings Relative to Targets: UK Evidence”. Accounting and Business Research, 37: 123–150.
43.
GriffinP. A.2003. “Got Information? Investor Response to Form 10-K and Form 10-Q Edgar Filings”. Review of Accounting Studies, 8 (December): 433–460.
44.
GuZ.ChenT.. 2004. “Analysts' Treatment of Non-Recurring Items in Street Earnings”. Journal of Accounting and Economics, 38 (December): 129–170.
45.
HaynC.1995. “The Information Content of Losses”. Journal of Accounting and Economics, 20 (September): 25–153.
46.
HealyP.HuttonA.PalepuK.. 1999. “Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure”. Contemporary Accounting Research, 16 (Fall): 485–520.
KothariS. P.ZimmermanJ.. 1995. “Price and Return Models”. Journal of Accounting and Economics, 20 (September): 155–192.
49.
LandsmanW. R.MillerB. L.YehS.. 2007. “Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation”. Journal of Business, Finance & Accounting, 34 (April/May): 650–675.
50.
LougeeB.MarquardtC.. 2004. “Earnings Informativeness and Strategic Disclosure: An Empirical Examination of Pro Forma Earnings”. The Accounting Review, 79 (July): 769–795.
51.
LundholmR.MyersL.. 2002. “Bringing the Future Forward: The Effect of Disclosure on the Returns-Earnings Relation”. Journal of Accounting Research, 40 (June): 809–839.
52.
MarquesA.2006. “SEC Interventions and the Frequency and Usefulness of Non-GAAP Financial Measures”. Review of Accounting Studies, 11 (December): 549–574.
53.
MatsumotoD.2002. “Management's Incentives to Avoid Negative Earnings Surprises”. The Accounting Review, 77 (July): 483–514.
54.
MillerM. H.ModiglianiF.. 1966. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57”. American Economic Review, 56 (June): 333–391.
OhlsonJ. A.1995. “Earnings, Book Values, and Dividends in Equity Valuation”. Contemporary Accounting Research (Spring): 661–687.
57.
PayneJ. L.RobbS.W.G.. 2000. “Earnings Management: The Effect of Ex Ante Earnings Expectations”. Journal of Accounting Auditing and Finance, 15 (Fall): 371–392.
58.
PiotroskiJ. D.RoulstoneD. T.. 2004. “The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information Into Stock Prices”. The Accounting Review, 79 (October): 1119–1151.
59.
PittH. L.2001. Remarks before the AICPA Governing Council. Miami Beach, FL, October 22.
60.
PreinreichG. A. D.1938. “Annual Survey of Economic Theory: The Theory of Depreciation”. Econometrica (6): 219–241.
61.
SchrandC. M.WaltherB. R.. 2000. “Strategic Benchmarks in Earnings Announcements: The Selective Disclosure of Prior-Period Earnings Components”. The Accounting Review, 75 (April): 151–177.
62.
SEC (Securities and Exchange Commission). 2001. “Cautionary Advice Regarding the Use of ‘Pro-Forma’ Financial Information in Earnings Releases”. December 4. http://www.sec.gov/rules/other/33-8039.htm (accessed February 18, 2002).
63.
SEC (Securities and Exchange Commission). 2003. “Final Rule: Conditions for Use of Non-GAAP Financial Measures”. January 22. http://www.sec.gov/rules/final/33-8176.htm (accessed May 2004).
