Investor Sentiment and Pro Forma Earnings Disclosures


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Abstract

While prior research suggests that investor sentiment influences various corporate financing and investment activities, limited empirical evidence exists on the influence of investor sentiment on firms’ disclosure and financial reporting strategies. We extend this research by examining the relation between investor sentiment and managers’ discretionary disclosure of adjusted (pro forma) earnings metrics. Using logit analysis, we find that managers’ propensity to disclose an adjusted earnings metric increases with the level of investor sentiment and in particular, the propensity to disclose an adjusted metric that exceeds the GAAP earnings figure. Further, our analyses suggest that as investor sentiment increases, managers (1) exclude higher levels of recurring and nonrecurring expenses in calculating the pro forma earnings figure and (2) place the pro forma figure more prominently within the earnings press release. Additional analyses indicate that the association between investor sentiment and managers’ pro forma disclosure decisions at least partly reflects opportunistic motives. Finally, we find that managerial sentiment also plays a role in firm’s pro forma disclosure decisions. This study is the first to explore the relation between investor sentiment and the type and placement of accounting information (and specifically alternative performance metrics) disclosed in earnings press releases.

 
Contact information:
Paolo Perego
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