Reconciling GAAP losses and pro forma profits: Effects on investor judgments and decisions

This study provides evidence that firms can influence investors' perceptions of their earnings reports by emphasizing pro forma profits and downplaying GAAP losses in a quarterly earnings release. Non-sophisticated investors who viewed an earnings release that emphasized a pro forma profit relative to a GAAP loss assessed earnings performance to be higher and invested a larger amount than those who viewed an earnings release that presented only the GAAP loss. Non-sophisticated investors who viewed an earnings release that emphasized a GAAP loss relative to a pro forma profit were not affected by the pro forma disclosure. In addition, sophisticated investors' earnings performance judgments and investment decisions were not affected by the pro forma disclosure. Presenting a side-by-side reconciliation of the GAAP and pro forma earnings statements diminished the influence of emphasizing pro forma earnings on non-sophisticated investors' earnings performance judgments and investment amounts. In contrast, sophisticated investors who viewed a side-by-side reconciliation assessed earnings performance to be higher and invested a larger amount than those who viewed the earnings statements sequentially.