The Impact of Graphical Displays of Pro Forma Earnings Information on Professional and Nonprofessional Investors' Earnings Judgments

Abstract

ABSTRACT: Regulation G (SEC 2003b) requires managers to reconcile textual non-GAAP performance measures (i.e., pro forma disclosures) to GAAP. Graphical disclosures also require reconciliation; however, neither the format nor the placement of the reconciliation is specified. We apply cognitive fit theory to argue that the influence of graphical information presentation formats is contingent on investor type and judgment complexity. Participants in our study viewed a simulated Investor Relations website for a large drug retailer and made judgments regarding current fiscal year earnings performance, earnings potential, and investment amount. We manipulated graphical (GAAP-only versus GAAP and pro forma) and textual (GAAP-only versus pro forma reconciled to GAAP) earnings disclosure content in a 2 × 2 between-participants design. We find that nonprofessional investors' current fiscal year earnings performance, earnings potential, and investment amount judgments are all influenced by graphical displays, which...