IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v17y2012i3d10.1007_s11142-012-9197-4.html
   My bibliography  Save this article

Discussion of “Why do pro forma and street earnings not reflect changes in GAAP? Evidence from SFAS 123R”

Author

Listed:
  • Theodore E. Christensen

    (Brigham Young University)

Abstract

Barth et al. (Review of Accounting Studies, this issue, 2012) identify the perfect natural laboratory setting in which they explore important questions related to non-GAAP earnings disclosures. By focusing on a single income statement line item, stock compensation expense, they can directly compare the behavior of managers and analysts in excluding that item from GAAP earnings. Their empirical analyses indicate that managers exclude the expense for opportunistic reasons. They also conclude that analysts are more likely to exclude the expense in order to increase the predictability of current-period earnings for future earnings. I believe their evidence provides a solid contribution to the literature on non-GAAP reporting. Moreover, it provides important evidence regarding the effectiveness of SFAS 123R’s requirement for the recognition of stock compensation expense in providing relevant earnings information to stakeholders. I provide a few comments regarding aspects of the paper that require clarification or that may influence the design of future studies. Overall, I believe this research provides an important contribution to the non-GAAP literature and that it will have a significant influence on the design of future studies.

Suggested Citation

  • Theodore E. Christensen, 2012. "Discussion of “Why do pro forma and street earnings not reflect changes in GAAP? Evidence from SFAS 123R”," Review of Accounting Studies, Springer, vol. 17(3), pages 563-571, September.
    • Handle: RePEc:spr:reaccs:v:17:y:2012:i:3:d:10.1007_s11142-012-9197-4
    DOI: 10.1007/s11142-012-9197-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-012-9197-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-012-9197-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Dirk E. Black & Theodore E. Christensen, 2009. "US Managers' Use of 'Pro Forma' Adjustments to Meet Strategic Earnings Targets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 297-326.
    2. Jeffrey T. Doyle & Russell J. Lundholm & Mark T. Soliman, 2003. "The Predictive Value of Expenses Excluded from Pro Forma Earnings," Review of Accounting Studies, Springer, vol. 8(2), pages 145-174, June.
    3. Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E. & Larson, Chad R., 2003. "Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 285-319, December.
    4. Richard Frankel & Sarah McVay & Mark Soliman, 2011. "Non-GAAP earnings and board independence," Review of Accounting Studies, Springer, vol. 16(4), pages 719-744, December.
    5. Mary E. Barth & Ian D. Gow & Daniel J. Taylor, 2012. "Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R," Review of Accounting Studies, Springer, vol. 17(3), pages 526-562, September.
    6. Nerissa C. Brown & Theodore E. Christensen & W. Brooke Elliott & Richard D. Mergenthaler, 2012. "Investor Sentiment and Pro Forma Earnings Disclosures," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(1), pages 1-40, March.
    7. Ana Marques, 2006. "SEC interventions and the frequency and usefulness of non-GAAP financial measures," Review of Accounting Studies, Springer, vol. 11(4), pages 549-574, December.
    8. Gu, Zhaoyang & Chen, Ting, 2004. "Analysts' treatment of nonrecurring items in street earnings," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 129-170, December.
    9. Daniel A. Cohen & Rebecca N. Hann & Maria Ogneva, 2007. "Another look at GAAP versus the Street: an empirical assessment of measurement error bias," Review of Accounting Studies, Springer, vol. 12(2), pages 271-303, September.
    10. Lawrence D. Brown & Kumar Sivakumar, 2003. "Comparing the Value Relevance of Two Operating Income Measures," Review of Accounting Studies, Springer, vol. 8(4), pages 561-572, December.
    11. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 41-66, March.
    12. Dirk E. Black & Theodore E. Christensen, 2009. "US Managers' Use of ‘Pro Forma’ Adjustments to Meet Strategic Earnings Targets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 297-326, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mark T. Bradshaw, 2011. "A discussion of “Do managers use earnings guidance to influence street earnings exclusions?”," Review of Accounting Studies, Springer, vol. 16(3), pages 528-538, September.
    2. Chih-Ying Chen, 2010. "Do analysts and investors fully understand the persistence of the items excluded from Street earnings?," Review of Accounting Studies, Springer, vol. 15(1), pages 32-69, March.
    3. Young-Soo Choi & Stephen Lin & Martin Walker & Steven Young, 2007. "Disagreement over the persistence of earnings components: evidence on the properties of management-specific adjustments to GAAP earnings," Review of Accounting Studies, Springer, vol. 12(4), pages 595-622, December.
    4. Jason V. Chen & Kurt H. Gee & Jed J. Neilson, 2021. "Disclosure Prominence and the Quality of Non‐GAAP Earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 59(1), pages 163-213, March.
    5. Mary E. Barth & Ian D. Gow & Daniel J. Taylor, 2012. "Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R," Review of Accounting Studies, Springer, vol. 17(3), pages 526-562, September.
    6. Theodore E. Christensen & Kenneth J. Merkley & Jennifer Wu Tucker & Shankar Venkataraman, 2011. "Do managers use earnings guidance to influence street earnings exclusions?," Review of Accounting Studies, Springer, vol. 16(3), pages 501-527, September.
    7. Bradshaw, Mark T. & Christensen, Theodore E. & Gee, Kurt H. & Whipple, Benjamin C., 2018. "Analysts’ GAAP earnings forecasts and their implications for accounting research," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 46-66.
    8. Nerissa C. Brown & Theodore E. Christensen, 2014. "The quality of street cash flow from operations," Review of Accounting Studies, Springer, vol. 19(2), pages 913-954, June.
    9. Chen, Xia & Jiang, Xuejun & Lu, Louise Yi & Yu, Yangxin, 2021. "Local political corruption and Firm's non-GAAP reporting," Journal of Corporate Finance, Elsevier, vol. 70(C).
    10. Florian Meier, 2020. "The Age of Cheap Money and Passive Investing: Are Pro Forma Earnings Value Relevant?," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 9(2), pages 1-1.
    11. Jeremiah W. Bentley & Theodore E. Christensen & Kurt H. Gee & Benjamin C. Whipple, 2018. "Disentangling Managers’ and Analysts’ Non‐GAAP Reporting," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 56(4), pages 1039-1081, September.
    12. Frank Heflin & Charles Hsu & Qinglu Jin, 2015. "Accounting conservatism and Street earnings," Review of Accounting Studies, Springer, vol. 20(2), pages 674-709, June.
    13. Ana Marques, 2006. "SEC interventions and the frequency and usefulness of non-GAAP financial measures," Review of Accounting Studies, Springer, vol. 11(4), pages 549-574, December.
    14. Mark Brosnan & Keith Duncan & Tim Hasso & Janice Hollindale, 2023. "Non‐GAAP earnings and executive compensation: An experiment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4375-4398, December.
    15. Silvia Gardini & F. Marta L. Di Lascio & Franco Visani, 2017. "Opportunism in disclosing pro-forma indicators: rationale and contextual drivers," BEMPS - Bozen Economics & Management Paper Series BEMPS42, Faculty of Economics and Management at the Free University of Bozen.
    16. Frank Heflin & Kalin S. Kolev & Benjamin Whipple, 2024. "The risk-relevance of non-GAAP earnings," Review of Accounting Studies, Springer, vol. 29(1), pages 493-524, March.
    17. Kyung, Hangsoo & Lee, Hakyin & Marquardt, Carol, 2019. "The effect of voluntary clawback adoption on non-GAAP reporting," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 175-201.
    18. Theodore E. Christensen & Enrique Gomez & Matthew Ma & Jing Pan, 2021. "Analysts’ role in shaping non-GAAP reporting: evidence from a natural experiment," Review of Accounting Studies, Springer, vol. 26(1), pages 172-217, March.
    19. Black, D.E. & Christensen, T.E., 2018. "Policy implications of research on non-GAAP reporting," Research in Accounting Regulation, Elsevier, vol. 30(1), pages 1-7.
    20. Bond, David & Czernkowski, Robert & Lee, Yong-Suk & Loyeung, Anna, 2017. "Market reaction to non-GAAP earnings around SEC regulation," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(3), pages 193-208.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:17:y:2012:i:3:d:10.1007_s11142-012-9197-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.