Are Investors Influenced by Pro Forma Emphasis and Reconciliations in Earnings Announcements?

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

Abstract

This study presents the results of an experiment that examines how two underlying characteristics of pro forma earnings announcements, pro forma emphasis and the presence of a quantitative reconciliation, influence non-professional investors' and analysts' reliance on pro forma disclosures. The results indicate that the emphasis management places on pro forma earnings, not the mere presence of pro forma earnings, influences non-professional investors' judgments and decisions, but that this influence is mitigated by the presence of a quantitative reconciliation. Further analysis reveals that the influence of pro forma emphasis on nonprofessional investors' judgments and decisions seems to be the result of an unintentional cognitive effect as opposed to the perceived informativeness of the earnings figure emphasized by management. Analysts' judgments and decisions were also affected by the presence of reconciliation, but in the opposite direction to those of nonprofessional investors. Specifically, the presence of a quantitative reconciliation led analysts to view pro forma earnings as more reliable, increasing their reliance on the pro forma disclosure in judging the earnings performance of the firm.

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References

1974Judgment under Uncertainty: Heuristics and Biases 1993The Adaptive Decision Maker 1994The Adaptive Decision Maker 1981Behavioral Decision Theory: Processes of Judgement and Choice 1992Order effects in belief updating: The belief-adjustment model 2008Financial Accounting Standards Board (FASB)1996A new look at anchoring effects: Basic anchoring and its antecedents.2000Effects of Comprehensive-Income Characteristics on Nonprofessional Investors' Judgments: The Role of Financial-Statement Presentation Format

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