Comparing the Value Relevance of Two Operating Income Measures

Comparing the Value Relevance of Two Operating Income Measures Prior research has shown that pro-forma (recurring operating) earnings reported by managers and analysts are more value relevant than GAAP net income. Since GAAP net income contains many non-operating items that reduce its value relevance compared to operating earnings, comparing the value relevance of GAAP net income with operating earnings unduly favors operating earnings. We show that operating earnings reported by managers and analysts are more value relevant than a measure of operating earnings derived from firms' financial statements, as reported by Standard and Poor's. Our evidence is important because it indicates that operating earnings reported by managers and analysts contain value relevant information beyond that provided by operating earnings obtained by sophisticated users from firms' financial statements. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Comparing the Value Relevance of Two Operating Income Measures

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1027328418571
Publisher site
See Article on Publisher Site

Abstract

Prior research has shown that pro-forma (recurring operating) earnings reported by managers and analysts are more value relevant than GAAP net income. Since GAAP net income contains many non-operating items that reduce its value relevance compared to operating earnings, comparing the value relevance of GAAP net income with operating earnings unduly favors operating earnings. We show that operating earnings reported by managers and analysts are more value relevant than a measure of operating earnings derived from firms' financial statements, as reported by Standard and Poor's. Our evidence is important because it indicates that operating earnings reported by managers and analysts contain value relevant information beyond that provided by operating earnings obtained by sophisticated users from firms' financial statements.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 3, 2004

References

  • Does EVA Beat Earnings? Evidence on Associations With Stock Returns and Firm Values
    Biddle, G.; Bowen, R.; Wallace, J.
  • GAAP Versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings
    Bradshaw, M.; Sloan, R. G.

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