Investor Sentiment and Pro Forma Earnings Disclosures



    1. Georgia State University
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    1. Brigham Young University
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    1. University of Illinois at Urbana–Champaign
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    1. University of Iowa. We thank Abbie Smith (the Editor) and an anonymous referee for valuable insights and suggestions. We also thank Dan Bens, Brian Cadman, Kun-chih Chen, Michael Clement, Rebecca Files, Dov Fischer, Umit Gurun, Christo Karuno, John McInnis, Darren Roulstone, Thorsten Sellhorn, Devin Shanthikumar, Siew Hong Teoh, Jeff Wurgler, Teri Yohn, and workshop participants at the University of Arizona, University of California (Irvine), University of Colorado (Boulder), Erasmus University, George Washington University, Georgia State University, University of Iowa, Ohio State University, University of South Florida, Southern Methodist University, University of Texas (Dallas), University of Utah, University of Washington (Seattle), the 19th Annual Conference on Financial Economics and Accounting, the 2009 AAA Annual Meetings, and the 2011 EAA Annual Congress for helpful comments and suggestions. We are grateful to Malcolm Baker and Jeff Wurgler for sharing their sentiment index data (available at and Itzhak Ben-David, John Graham, and Campbell Harvey for sharing managerial optimism data from the Duke University/CFO Magazine Business Outlook Survey. Finally, we thank the many research assistants at Brigham Young University who helped in hand-collecting our sample of pro forma earnings data.
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We examine the influence of investor sentiment on managers’ discretionary disclosure of “pro forma” (adjusted) earnings metrics in earnings press releases. We find that managers’ propensity to disclose an adjusted earnings metric (especially one that exceeds the GAAP earnings number) increases with the level of investor sentiment. Furthermore, our analyses suggest that, as investor sentiment increases, managers: (1) exclude higher levels of both recurring and nonrecurring expenses in calculating the pro forma earnings number and (2) emphasize the pro forma figure by placing it more prominently within the earnings press release. Additional analyses indicate that the association between investor sentiment and managers’ pro forma disclosure decisions at least partly reflects opportunistic motives. Finally, we find that managers’ own sentiment-driven expectations also play a role in their pro forma disclosure decisions.