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The valuation impact of reconciling pro forma earnings to GAAP earnings

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  • Zhang, Huai
  • Zheng, Liu

Abstract

Regulation G requires all companies to quantitatively reconcile pro forma earnings with GAAP earnings. This paper provides three findings related to the impact of reconciliations on mispricing of pro forma earnings. First, prior to Reg G, we find that mispricing of pro forma earnings is limited to firms with low reconciliation quality. There is no evidence of mispricing for firms with high reconciliation quality. Second, we find no evidence of mispricing after Reg G. Third, there is a cross-Reg G reduction of mispricing for firms whose reconciliation quality improves, and there continues to be no mispricing for firms that have high reconciliation quality both before and after Reg G. Together, our results support the notion that better reconciliations reduce the extent of mispricing.

Suggested Citation

  • Zhang, Huai & Zheng, Liu, 2011. "The valuation impact of reconciling pro forma earnings to GAAP earnings," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 186-202, February.
  • Handle: RePEc:eee:jaecon:v:51:y:2011:i:1-2:p:186-202
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:advacc:v:30:y:2014:i:1:p:154-167 is not listed on IDEAS
    2. Steven Young, 2014. "The drivers, consequences and policy implications of non-GAAP earnings reporting," Accounting and Business Research, Taylor & Francis Journals, vol. 44(4), pages 444-465, August.
    3. repec:eee:jaecon:v:66:y:2018:i:1:p:46-66 is not listed on IDEAS
    4. repec:eee:reacre:v:25:y:2013:i:2:p:236-251 is not listed on IDEAS
    5. repec:eee:reacre:v:30:y:2018:i:1:p:1-7 is not listed on IDEAS
    6. repec:spr:reaccs:v:23:y:2018:i:4:d:10.1007_s11142-018-9459-x is not listed on IDEAS
    7. repec:eee:reacre:v:26:y:2014:i:2:p:175-195 is not listed on IDEAS
    8. repec:eee:advacc:v:30:y:2014:i:1:p:43-54 is not listed on IDEAS
    9. Silvia Gardini & F. Marta L. Di Lascio & Franco Visani, 2017. "How cultural and contextual variables affect the disclosure and transparency of pro-forma indicators," BEMPS - Bozen Economics & Management Paper Series BEMPS41, Faculty of Economics and Management at the Free University of Bozen.
    10. repec:bla:ausact:v:27:y:2017:i:4:p:480-493 is not listed on IDEAS
    11. Amber Johnson & Majella Percy & Peta Stevenson-Clarke & Robyn Cameron, 2014. "The Impact of the Disclosure of Non-GAAP Earnings in Australian Annual Reports on Non-Sophisticated Users," Australian Accounting Review, CPA Australia, vol. 24(3), pages 207-217, September.
    12. Qianyun Huang & Terrance R. Skantz, 2016. "The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements," Review of Accounting Studies, Springer, vol. 21(1), pages 198-250, March.

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