Doyle et al. (2002)

Reference

The Predictive Value of Expenses Excluded from Pro Forma Earnings^a

Jeffrey T. Doyle, Russell J. Lundholm and Mark T. Soliman

Working Paper (October, 2002).

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Synopsis

This study shows that firms reporting 'pro forma' earnings numbers that exclude losses and expenses required under GAAP experience lower future cash flows and stock returns. The results are particularly pronounced for 'other' exclusions relating to recurring expenses rather than 'special item' exclusions relating to non-recurring charges. For example, the three year cumulative return to a hedge portfolio based on 'other exclusions' is almost 30%. However, I am concerned that the results may prove to be sample specific. They are based on a relatively small sample size and short sample period and most of the hedge portfolio returns are not realized until the third future year.