The Effects of Pro-Forma Earnings Content and CEO Statements on Investor Decision Making and Perceived Disclosure Credibility

• In Event: Financial Accounting and Reporting 1

Abstract

The objective of this study is to examine the reactions of nonprofessional investors to pro-forma earnings content and firm earnings impact in earnings announcements. This study uses an experimental method utilizing a 2x2 full factorial design. The first manipulation manipulates pro forma earnings content as either standard or non-standard, where standard indicates common and nonstandard indicates unusual adjustments to Net Income reported by companies. The second manipulation involves the presence of a statement from the CEO expressing optimism about the future. We examine subject’s assessment of disclosure credibility, firm prospects, and their own willingness to invest in the firm. We find that nonprofessional investors with higher levels of sophistication exhibit higher levels of willingness to invest compared in firms which use nonstandard exclusions for calculating pro-forma earnings and whose CEOs include optimistic statements about future firm prospects. By contrast, we find that more sophisticated nonprofessional investors, compared to their less sophisticated counterparts, do not change their assessments of disclosure credibility in the presence of these earnings announcement attributes. This study represents an important examination of professional and nonprofessional investor reactions to pro forma earnings content, a timely and important topic given the recent high profile cases involving alleged manipulation of pro forma content in IPO and publicly traded firms.

Authors

• Anthony P Curatola, Drexel University

• Robert H. Lee, Pepperdine University - Malibu

• Michael Thomas Paz, Drexel University