Emphasis on Pro Forma versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC Intervention, and Market Reactions

Earnings press releases provide managers a forum to present their firm's quarterly financial information and perhaps influence perceptions of the firm's stakeholders. We explore the use of managerial emphasis as a disclosure tool and contribute to the debate over pro forma earnings. We exa...

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Bibliographic Details
Published in:The Accounting review 2005-10, Vol.80 (4), p.1011-1038
Main Authors: Bowen, Robert M., Davis, Angela K., Matsumoto, Dawn A.
Format: Article
Language:English
Subjects:
Accounting methods
Business accounting
Business metrics
Business structures
Disclosure
Earnings
Earnings announcements
Earnings per share
Empirical tests
Financial information
Financial reporting
GAAP
Generally accepted accounting principles
Investors
Journalism
Market analysis
Media
Net income
Press releases
Pro forma court rulings
Regression coefficients
Securities markets
Stock exchange
Stock markets
Studies
Variable coefficients
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Summary:Earnings press releases provide managers a forum to present their firm's quarterly financial information and perhaps influence perceptions of the firm's stakeholders. We explore the use of managerial emphasis as a disclosure tool and contribute to the debate over pro forma earnings. We examine (1) the determinants of emphasis placed on pro forma and GAAP earnings within quarterly earnings press releases, (2) whether there has been a shift away from emphasizing pro forma earnings toward GAAP earnings, and (3) whether stock market reactions to earnings news were influenced by emphasis placed on metrics within the press release. We find that firms emphasize metrics that are more value-relevant and portray more favorable firm performance. We also find that the extent of a firm's media coverage affects managers' emphasis decisions. Further, our results indicate a highly significant shift toward GAAP emphasis and away from pro forma emphasis in 2002 relative to 2001. Finally, our stock market tests suggest that greater emphasis on an earnings metric results in a stronger market reaction to the surprise in that metric. Overall, these findings are consistent with managers using emphasis in the earnings press release as a disclosure tool and this emphasis influencing at least one important stakeholder group-investors.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr.2005.80.4.1011