IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v8y2003i4d10.1023_a1027328418571.html
   My bibliography  Save this article

Comparing the Value Relevance of Two Operating Income Measures

Author

Listed:
  • Lawrence D. Brown

    (Georgia State University)

  • Kumar Sivakumar

    (Boston University)

Abstract

Prior research has shown that pro-forma (recurring operating) earnings reported by managers and analysts are more value relevant than GAAP net income. Since GAAP net income contains many non-operating items that reduce its value relevance compared to operating earnings, comparing the value relevance of GAAP net income with operating earnings unduly favors operating earnings. We show that operating earnings reported by managers and analysts are more value relevant than a measure of operating earnings derived from firms' financial statements, as reported by Standard and Poor's. Our evidence is important because it indicates that operating earnings reported by managers and analysts contain value relevant information beyond that provided by operating earnings obtained by sophisticated users from firms' financial statements.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:4:d:10.1023_a:1027328418571
    DOI: 10.1023/A:1027328418571
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1023/A:1027328418571
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1023/A:1027328418571?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. Lipe, Rc, 1986. "The Information Contained In The Components Of Earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 24, pages 37-64.
    2. Ali, Ashiq & Zarowin, Paul, 1992. "Permanent versus transitory components of annual earnings and estimation error in earnings response coefficients," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 249-264, August.
    3. Aboody, D & Lev, B, 1998. "The value relevance of intangibles: The case of software capitalization," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 36, pages 161-191.
    4. Elliott, JA & Hanna, JD, 1996. "Repeated accounting write-offs and the information content of earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34, pages 135-155.
    5. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
    6. Biddle, Gary C. & Bowen, Robert M. & Wallace, James S., 1997. "Does EVA(R) beat earnings? Evidence on associations with stock returns and firm values," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 301-336, December.
    7. Francis, J & Hanna, JD & Vincent, L, 1996. "Causes and effects of discretionary asset write-offs," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34, pages 117-134.
    8. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    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. 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.
    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. 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.
    7. Daniel W. Collins & Oliver Zhen Li & Hong Xie, 2009. "What drives the increased informativeness of earnings announcements over time?," Review of Accounting Studies, Springer, vol. 14(1), pages 1-30, March.
    8. 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.
    9. 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.
    10. 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.

    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. Carol Anilowski Cain & Kalin S. Kolev & Sarah McVay, 2020. "Detecting Opportunistic Special Items," Management Science, INFORMS, vol. 66(5), pages 2099-2119, May.
    2. Anagnostopoulou, Seraina C. & Gounopoulos, Dimitrios & Malikov, Kamran & Pham, Hang, 2021. "Earnings management by classification shifting and IPO survival," Journal of Corporate Finance, Elsevier, vol. 66(C).
    3. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    4. Jeffery S. Abarbanell & Reuven Lehavy, 2007. "Letting the “Tail Wag the Dog†: The Debate over GAAP versus Street Earnings Revisited," Contemporary Accounting Research, John Wiley & Sons, vol. 24(3), pages 675-723, September.
    5. Gjerde, Øystein & Knivsflå, Kjell & Sættem, Frode, 2008. "The value-relevance of adopting IFRS: Evidence from 145 NGAAP restatements," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 17(2), pages 92-112.
    6. Nagar, Neerav & Desai, Naman & Jacob, Joshy, 2021. "Do Big 4 auditors limit classification shifting? Evidence from India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    7. Patricia M. Fairfield & Karen A. Kitching & Vicki Wei Tang, 2009. "Are special items informative about future profit margins?," Review of Accounting Studies, Springer, vol. 14(2), pages 204-236, September.
    8. 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.
    9. Haeyoung Shin & Michael Lacina & Shanshan Pan, 2024. "The order in a series of continuous special items and the likelihood of income classification shifting," Review of Quantitative Finance and Accounting, Springer, vol. 63(3), pages 829-862, October.
    10. 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.
    11. Mark T. Bradshaw & Michael S. Drake & James N. Myers & Linda A. Myers, 2012. "A re-examination of analysts’ superiority over time-series forecasts of annual earnings," Review of Accounting Studies, Springer, vol. 17(4), pages 944-968, December.
    12. Li, Valerie & Luo, Yan, 2023. "Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States," Advances in accounting, Elsevier, vol. 60(C).
    13. Shi, Linna & Wang, Ping & Zhou, Nan, 2017. "Enhanced disclosure of other comprehensive income and increased usefulness of net income: The implications of Accounting Standards Update 2011–05," Research in Accounting Regulation, Elsevier, vol. 29(2), pages 139-144.
    14. Ball, Ray & Shivakumar, Lakshmanan, 2005. "Earnings quality in UK private firms: comparative loss recognition timeliness," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 83-128, February.
    15. Ravi Dharwadkar & David Harris & Linna Shi & Nan Zhou, 2020. "The initiation of audit committee interlocks and the contagion of accounting policy choices: evidence from special items," Review of Accounting Studies, Springer, vol. 25(1), pages 120-158, March.
    16. Wang, Qian & Ettredge, Michael, 2015. "Discretionary allocation of corporate income to segments," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 1-13.
    17. Richard Frankel, 2009. "Discussion of "Are special items informative about future profit margins?"," Review of Accounting Studies, Springer, vol. 14(2), pages 237-245, September.
    18. Serge Agbodjo & Isabelle Martinez, 2012. "La création de valeur actionnariale est-elle pertinente pour la prise de décision d'investissement ? Une étude empirique du SBF250 par secteurs d'activité," Post-Print hal-00935809, HAL.
    19. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    20. Dennis Chambers & Ross Jennings & Robert B. Thompson, 1999. "Evidence on the Usefulness of Capital Expenditures as an Alternative Measure of Depreciation," Review of Accounting Studies, Springer, vol. 4(3), pages 169-195, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    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:8:y:2003:i:4:d:10.1023_a:1027328418571. 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.