1 Does Regulation G Change the Way that Analysts Use Pro Forma Earnings Information?

This paper provides evidence bearing on the controversial debates about pro forma earnings information in the literatures. Pro forma earnings exclude normal income statement items that managers deem to be nonrecurring or non-representative of ongoing operations. Some studies identify pro forma information as managerial attempts to disclose a clearer picture of core earnings, while others regard them as attempts to mislead investors. The Securities and Exchange Commission (SEC) has established Regulation G (Reg. G), which requires companies to quantitatively reconcile pro forma earnings with Generally Accepted Accounting Principles (GAAP) earnings. By investigating analysts, we extend prior research by conducting a complete examination of the association between pro forma information and forecast revisions. We find that analysts use pro forma earnings to revise their forecasting earnings, especially after the implementation of Reg. G. In addition, our results strongly hold for those pro forma press releases which contain directly comparable reconciliation of the GAAP and Non-GAAP earnings numbers. Finally, we find that pro forma press releases from high-tech firms are more convincing to analysts than those of non-high-tech firms. We thus show that analysts appear to use pro forma earnings information in their forecasting revisions, and that Regulation G enhances the quality of pro forma earnings reporting