Dawn A. Matsumoto

Emphasis on Pro Forma versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC intervention, and Market Reactions

Earnings press releases provide managers a means to emphasize alternative earnings metrics and perhaps influence the perceptions of firm stakeholders. Recent accounting scandals heightened public scrutiny of accounting disclosures and prompted regulators to issue advice regarding the content and composition of firms’ earnings press releases. We explore the use of managerial emphasis as a disclosure tool and contribute to the current debate over pro forma earnings. Specifically, we examine (1) the determinants of emphasis placed on pro forma and GAAP earnings within quarterly earnings press releases, (2) whether there has been a shift away from (toward) emphasizing pro forma (GAAP) earnings, and (3) whether stock market reactions to earnings news were influenced by emphasis placed on metrics within the press release. We consider two measures of emphasis: the level of emphasis (based on where pro forma and GAAP earnings are mentioned in the press 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. We find that firms focus on metrics that are more value-relevant and portray more favorable firm performance. We also find that the extent to which the firm’s press release is likely to be publicized in the news (i.e., the extent of media coverage) affects managers’ emphasis decision. Further, our results indicate a highly significant shift toward (away from) GAAP (pro forma) emphasis in 2002 relative to 2001. Finally, our stock market tests suggest that greater emphasis on pro forma or GAAP earnings in the quarterly press release results in a larger reaction to the news. Overall, these findings are consistent with managers using emphasis in the earnings press release as a disclosure tool and this emphasis influencing at least one important stakeholder group.

Assessing methods of identifying management forecasts: CIG vs. researcher collected

This paper examines the characteristics of management forecasts available on Thomson First Call’s Company Issued Guidance (CIG) database relative to a sample of forecasts hand-collected through a search of company press releases. Due to the significantly lower cost of using CIG (relative to hand-collecting data), academics have increasingly relied on this database as a source of management forecasts. However, it is important for researchers to consider the properties of this database (such as coverage, accuracy, and breadth) when evaluating whether it is an appropriate data source for their study. Overall, our results suggest systematic differences between forecasts reported on CIG and forecasts gathered from company press releases. We suggest several sample criteria that will remove or mitigate these biases.

The Effect of Manager-Specific Optimism on the Tone of Earnings Conference Calls

The use of more or less positive language in corporate disclosures has been the subject of increased interest in the academic literature. We add to this stream of research by examining whether there is a manager-specific component in the tone of earnings-announcement related conference calls. We find that the tone of conference calls that is not explained by current performance, future performance, and strategic incentives has a significant manager-specific component. We also find that tone is significantly associated with manager-specific factors such as early career experiences and involvement in charitable organizations. Taken together, our findings indicate that, in addition to reflecting current and future performance, the tone of conference calls is significantly influenced by a manager-specific tendency to be optimistic or pessimistic. We also find some evidence of a manager-specific component to conference call returns, which is consistent with manager-specific optimism impacting investors’ interpretation of disclosures made in conference calls.