323 AJBMR • Doi Publications
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  • INFORMATION CONTENT OF PRO FORMA EARNINGS
    â–ºShu-Ling Hsu

     10.52283/NSWRCA.AJBMR.20160507A03

    ABSTRACT

    An increasing number of firms release “pro forma” earnings along with net income in their financial reports in the press. The pro forma earnings are defined by individual firms which are different from the net income defined under Generally Accepted Accounting Principles (GAAP). Lougee and Marquardt (2004) indicated that companies with less informative GAAP earnings were more likely to engage in reporting pro forma earnings than others. This study examines whether the pro forma earnings provide information to investors about future earnings in the Taiwanese stocks market. A condition of information asymmetry exists between investors and managers, and pro forma earnings are a way to disclose the latter’s ideas about their firms’ future profitability to investors. The quality of the financial information that is provided will impact investors’ predictions about firms’ future earnings, and so affect stock prices. The purpose of this study is thus to investigate the information content of pro forma earnings, and examine whether pro forma earnings can provide details of future earnings to the investors in the Taiwanese stock market. We collect 3,287 firm-year observations listed on the Taiwan Stock Exchange or Gre Tai Securities Market from 2008 to 2012, and our data is from the Taiwan Economic Journal (TEJ) database. Our results show that the disclosure of pro forma earnings can improve the association between current returns and future earnings. This implies that the disclosure of pro forma earnings reveals credible information, which is then incorporated into current returns.
    Keywords: Information content, Pro-forma earnings, Future earnings response coefficient, Stock prices
    JEL Classification: M41, R53  

    Pages:22-34 :: Download-View
 
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