Journal of Finance and Investment Analysis

The Age of Cheap Money and Passive Investing: Are Pro Forma Earnings Value Relevant?

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• Abstract 

  This study investigates the impact of pro forma earnings on stock misvaluation. In light of a decade of substantial changes in the market and investment environment since 2008 that are challenging the traditional primacy of accounting disclosures for valuation, I link mispriced shares to voluntary firm disclosures. Using a hand-collected sample of pro forma earnings from quarterly earnings press releases of the constituent firms of the US Dow Jones 30 between 2011 and 2017, I find that providing pro forma earnings reduces overvaluation for the most overvalued stocks. Further analysis indicates, however, that for firms with higher analyst earnings forecast dispersion, disclosing pro forma earnings increases these firms’ overvaluation. In addition, different types of expenses excluded to meet or beat analyst earnings forecasts affect misvaluation differently. These findings suggest that pro forma earnings still play an important role and are value relevant in the new market conditions.

  JEL classification numbers: G38, M40, M41

  Keywords: Accounting disclosure; pro forma earnings; non-GAAP disclosures; stock misvaluation