The Predictive Value of Expenses Excluded from Pro Forma Earnings

Jeffrey T. Doyle (), Russell J. Lundholm () and Mark T. Soliman ()
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Jeffrey T. Doyle: University of Michigan Business School
Russell J. Lundholm: University of Michigan Business School
Mark T. Soliman: University of Michigan Business School

Review of Accounting Studies, 2003, vol. 8, issue 2, No 2, 145-174

Abstract: Abstract We investigate the informational properties of pro forma earnings. This increasingly popular measure of earnings excludes certain expenses that the company deems non-recurring, non-cash, or otherwise unimportant for understanding the future value of the firm. We find, however, that these expenses are far from unimportant. Higher levels of exclusions lead to predictably lower future cash flows. We also find that investors do not fully appreciate the lower cash flow implications at the time of the earnings announcement. A trading strategy based on the excluded expenses yields a large positive abnormal return in the years following the announcement, and persists after controlling for various risk factors and other anomalies.

Keywords: pro forma earnings; capital markets; market efficiency; mispricing (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/A:1024472210359

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