More company information is better – including pro forma earnings

Baruch Lev has a new (published last November) book (Winning Over Investors) and Harvard Business Review article on corporate financial reporting (“How to Win Investors Over”). Bottom line: “Corporate managers who don’t share relevant information face a substantial share price discount, a higher cost of capital, and a more volatile stock price.”
He doesn’t get in to a lot of detail in the article about reporting of intangibles. But he does advocate the use of pro-forma accounting as a compliment to the required GAAP accounting:

I see nothing wrong with managers’ honest attempts to improve on GAAP earnings by releasing alternative numbers, particularly after the 2003 SEC requirement that non-GAAP measures included in earnings releases and statutory filings be reconciled with GAAP numbers. Because pro forma earnings are disclosed along with, not in lieu of, GAAP earnings– and the differences between the two measures are highlighted–investors cannot be worse off with pro forma earnings. On the contrary, they are better off.
. . .
GAAP is particularly deficient at satisfying investors’ information needs about “change” companies. These include innovative, intangibles-intensive enterprises; high-growth and early-life-cycle businesses; and organizations undergoing strategic restructuring. If your company has any of those characteristics, you should give serious thought to systematically releasing pro forma earnings and other non-GAAP information, such as the number of patents granted during the period specified, the churn rate of customers, and the gains from online activities.

I would go a little further and argue for some standards on that pro-forma accounting – so that it can be used to make year-to-year, company-to-company, and industry-to-industry comparisons.
But I like the strategy of going around the deficiencies of GAAP accounting using the allowed mechanism of pro forma reports.

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