Article2007

Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation

77 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

Abstract: This study addresses three research questions relating to total exclusions, special items, and other exclusions. Are each of these pro forma exclusion components forecasting irrelevant? Are each of the exclusion components value irrelevant? Are the valuation multiples on the exclusion components justified by their ability to forecast future profitability as predicted by the Ohlson (1999) model? Findings are generally consistent with the market‐inefficiency results presented in Doyle et al. (2003) . Total exclusions are valued negatively by the market despite the prediction that total exclusions will be valued positively. Valuation results also suggest that stocks with positive other exclusions are overpriced.

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References

1995Earnings, Book Values, and Dividends in Equity Valuation*1997Changes in the value-relevance of earnings and book values over the past forty years 2002Management's Incentives to Avoid Negative Earnings Surprises 1998Taxes, Financing Decisions, and Firm Value 1999An empirical assessment of the residual income valuation model 1998Relative valuation roles of equity book value and net income as a function of financial health 2002GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings 1995Price and return models

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