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

• 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
• ISSN: 0001-4826; 1558-7967
• DOI: 10.2308/accr.2005.80.4.1011

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.