Abstract
We analyze the earnings information and stock prices of S&P500 firms and find that investors fol lowing S&P500 stocks (i) respond more to pro forma earnings than to GAAP earnings, (ii) respond to an emphasis on pro forma earnings, and (iii) are fixated on pro forma earnings. We provide the first direct evidence that a strategic emphasis on earnings numbers may affect return volatility. Further, our results do not support the argument that a larger investor response to Street earnings might be driven by large differences between the Street numbers and GAAP numbers.
Highlights
This study examines whether a strategic emphasis on earnings numbers in company press releases has any impact on stock returns
We use a sample of 308 S&P500 firms for the period from 2000:Q1 - 2006:Q3.1 In this particular sample, our results show that investors following S&P500 stocks: (i) respond more to pro forma earnings than to GAAP earnings; (ii) respond to an emphasis on pro forma earnings in earnings press releases; and (iii) are fixated on pro forma earnings
A stronger market reaction to pro forma earnings than GAAP earnings indicates that investors prefer to rely on pro forma numbers to make their investment decisions
Summary
This study examines whether a strategic emphasis on earnings numbers in company press releases has any impact on stock returns. This paper provides compelling evidence that studies examining the emphasis of alternative earnings metrics on stock return responses should consider the impact of the fourth quarter because most write-offs and special items are recognized in the fourth quarter (Bradshaw & Sloan, 2002). We use a sample of 308 S&P500 firms for the period from 2000:Q1 - 2006:Q3.1 In this particular sample, our results show that investors following S&P500 stocks: (i) respond more to pro forma earnings than to GAAP earnings (evident from the earnings response coefficients); (ii) respond to an emphasis on pro forma earnings in earnings press releases; and (iii) are fixated on pro forma earnings.
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