Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R

Mary E. Barth (), Ian D. Gow () and Daniel J. Taylor ()
Additional contact information
Mary E. Barth: Stanford University
Ian D. Gow: Harvard Business School
Daniel J. Taylor: University of Pennsylvania

Review of Accounting Studies, 2012, vol. 17, issue 3, No 4, 526-562

Abstract: Abstract This study examines how key market participants—managers and analysts—responded to SFAS 123R’s controversial requirement that firms recognize stock-based compensation expense. Despite mandated recognition of the expense, some firms’ managers exclude it from pro forma earnings and some firms’ analysts exclude it from Street earnings. We find evidence consistent with managers opportunistically excluding the expense to increase earnings, smooth earnings, and meet earnings benchmarks but no evidence that these exclusions result in an earnings measure that better predicts future firm performance. In contrast, we find that analysts exclude the expense from earnings forecasts when exclusion increases earnings’ predictive ability for future performance and that opportunism generally does not explain exclusion by analysts incremental to exclusion by managers. Thus our findings indicate that opportunism is the primary explanation for exclusion of the expense from pro forma earnings and predictive ability is the primary explanation for exclusion from Street earnings. Our findings suggest the controversy surrounding the recognition of stock-based compensation expense may be attributable to cross-sectional variation in the relevance of the expense for equity valuation, as well as to differing incentives of market participants.

Keywords: Stock-based compensation; SFAS 123R; Non-GAAP earnings; Street earnings; Pro forma earnings; Earnings forecast exclusions; Incentives (search for similar items in EconPapers)
JEL-codes: G10 M4 M41 (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-012-9192-9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:17:y:2012:i:3:d:10.1007_s11142-012-9192-9

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-012-9192-9

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().