Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and Gaap Operating Earnings

This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than standard GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. We document a significant difference between pro forma numbers reported by managers and earnings figures published by I/B/E/S, and conclude that it is problematic to use an income figure reported by I/B/E/S as a proxy for pro forma earnings. Our analyses of short-window abnormal returns and revisions in analysts' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income