The first author is from Fuqua School of Business, Duke University, USA. The second, third and fourth authors are from the Marriott School of Management, Brigham Young University, USA. They express appreciation to Brigham Young University for student mentoring grants that made the collection of the pro forma earnings data possible, and to the many students who have read thousands of press releases to hand-collect the data. The authors also express appreciation to workshop participants at Duke University and for the helpful comments of the anonymous referee and the editor. Dirk Black expresses appreciation to the Deloitte Foundation for financial support.
Has the Regulation of Pro Forma Reporting in the US Changed Investors’ Perceptions of Pro Forma Earnings Disclosures?
Article first published online: 24 OCT 2012
© 2012 Blackwell Publishing Ltd
Journal of Business Finance & Accounting
Volume 39, Issue 7-8, pages 876–904, September/October 2012
How to Cite
Black, D. E., Black, E. L., Christensen, T. E. and Heninger, W. G. (2012), Has the Regulation of Pro Forma Reporting in the US Changed Investors’ Perceptions of Pro Forma Earnings Disclosures?. Journal of Business Finance & Accounting, 39: 876–904. doi: 10.1111/j.1468-5957.2012.02297.x
- Issue published online: 24 OCT 2012
- Article first published online: 24 OCT 2012
- (Paper received December 2008, revised version accepted May 2012)
- pro forma earnings;
- corporate disclosure;
- the Sarbanes-Oxley Act of 2002
Abstract: We explore whether investors’ perceptions of pro forma earnings numbers have changed following the regulation of pro forma reporting imposed by the Sarbanes-Oxley Act of 2002 (SOX). First, we find that investors appear to pay more attention to pro forma earnings disclosures in the post-SOX period, consistent with the notion that they perceive that regulation generally renders these disclosures more credible. Second, the results indicate that investors discount aggressive pro forma earnings reports in both periods. However, they appear to discount at least some potentially misleading pro forma earnings disclosures more in the post-SOX period. Finally, our results imply that the regulation of pro forma reporting has increased the average quality of pro forma earnings disclosures by filtering out those that are most likely to be misleading. These results are consistent with the conclusions that (1) the quality of pro forma reporting has improved following SOX, and (2) investors’ perceptions of pro forma earnings metrics have changed in the post-SOX regulatory environment.