Abstract
This paper addresses the main problem raised by pro forma (or “street”) earnings. The aim is to help investors find their focus as they rely on pro forma earnings figures to make decisions on investing in French publicly-traded securities. We study 116 pro forma earnings announcements made over the period 1996 - 2006 to investigate why French traded corporations use pro forma reporting in their annual earnings announcement press releases. Interestingly, the study finds that managers use pro forma earnings numbers strategically to report better corporate performance than numbers based on GAAP earnings metrics. In 79% of the cases we identified, pro forma numbers are higher than GAAP numbers, suggesting that managers have significant motives for reporting a profit that would be higher than under GAAP-based numbers and higher than in analysts’ forecasts. Furthermore, about 82% of pro forma announcements should have disclosed bad news that would have been revealed by releasing GAAP earnings. Finally, we show that pro forma numbers are much more informative than GAAP earnings.
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