The Presentation Arrangements of Pro Forma Earnings Disclosures : Managerial Incentives and Market Responses

Different from prior studies which discussed the relationship between GAAP and pro forma earnings from the informativeness perspective, this study presents a detailed discussion about the importance of presentation arrangements of pro forma disclosures. The results show that managers are able to influence the market's perception of earnings by using various presentation arrangements opportunistically. In addition, the results also show that the implement of Reg G, which requires detailed reconciliation between GAAP and pro forma earnings, effectively reduces such influence by 1) discouraging managers from using presentation arrangements to highlight favorable earnings opportunistically, 2) reinforcing the dominant position of GAAP earnings, and 3) reducing the influence of presentation arrangements over investors' decision making. Together, this study supports the notion that Reg G indeed eliminates the excessive use of pro forma earnings and results in a more accurate pricing of earnings