The determinants of voluntary disclosure of adjusted earnings per share measures by UK quoted companies

This study describes and explains the variety of disclosure practices employed by UK companies to report earnings per share measures following the introduction of FRS3. In addition to describing the practices of UK companies we construct an econometric model designed to explain the observed variation in the willingness of firms to disclose additional earnings per share measures. We conclude that the willingness of firms to disclose alternative earnings per share measures is driven by two main types of considerations. First, the general disclosure stance of the company: firms that generally exhibit high levels of disclosure are more likely to disclose alternative earnings per share measures. Second, except for firms in loss situations, firms generally appear to be motivated to present a more favourable earnings profile. Firms in loss situations seem to be concerned to divert investor attention away from reported losses either by reporting an alternative EPS that is positive when FRS3 EPS is negative, or by failing to report a negative alternative EPS when FRS3 EPS is positive. We find that the likelihood of a firm disclosing losses under FRS3 reporting a lower loss per share, is much smaller than the likelihood of a firm reporting profits under FRS3 reporting a higher alternative profit per share, perhaps because managers fear any alternative figure will be interpreted by the market as a measure of sustainable earnings. This finding is consistent with management not wanting to create the impression that a current loss is likely to be sustained.