Robert M. Bowen
University of Washington
Angela K. Davis
Washington University in St. Louis
Dawn A. Matsumoto
University of Washington
Abstract: Recent accounting scandals have heightened public scrutiny of accounting disclosures and prompted regulators to issue advice regarding the content and composition of firmsÂ’ press releases that announce quarterly financial results. These press releases provide managers a means to emphasize alternative earnings metrics and perhaps influence the perceptions of firm stakeholders. We explore the use of emphasis as a disclosure tool and contribute to the current debate over pro forma earnings. Specifically, we examine (i) the determinants of emphasis placed on pro forma and GAAP earnings within quarterly earnings press releases, and (ii) whether there has been a shift away from (toward) emphasizing pro forma (GAAP) earnings.
We consider two measures of emphasis: the level of emphasis (based on where pro forma and GAAP earnings are mentioned in the release) and relative emphasis (the difference in placement between pro forma and GAAP earnings). Our results are consistent with managers being strategic in their emphasis on alternative earnings metrics, suggesting that placement of metrics within the earnings release is neither random nor boilerplate but, rather, focuses on metrics that are more value-relevant and that portray more favorable firm performance. Further, our analysis of the change in emphasis from 2001 to 2002 indicates a highly significant shift toward (away from) GAAP (pro forma) emphasis. Overall, these findings are consistent with managers using emphasis as a disclosure tool.
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