The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements

Qianyun Huang () and Terrance R. Skantz ()
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Qianyun Huang: City University of New York
Terrance R. Skantz: University of Texas – Arlington

Review of Accounting Studies, 2016, vol. 21, issue 1, No 6, 198-250

Abstract: Abstract Using adverse-selection cost as a proxy for information asymmetry, we find evidence that non-GAAP earnings numbers issued by management (pro forma earnings) and analysts (street earnings) improve price discovery. First, information asymmetry before an earnings announcement is positively associated with the probability of a non-GAAP earnings number at the forthcoming earnings announcement. Second, the post-announcement reduction in information asymmetry is greater when managers or analysts issue non-GAAP earnings at the earnings announcement and when the magnitude of the non-GAAP earnings adjustment is larger. Our results suggest that earnings adjustments by analysts and managers increase the amount and precision of earnings information and help to narrow information asymmetry between informed and uninformed traders following earnings announcements. Alternatively, the findings may be attributable to characteristics of non-GAAP firms and overall better reporting quality for those firms rather than non-GAAP earnings disclosure per se.

Keywords: Information asymmetry; Pro forma earnings; Street earnings; Non-GAAP earnings; Adverse selection; Earnings precision (search for similar items in EconPapers)
JEL-codes: G10 G14 M40 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11142-015-9345-8

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