The Value Relevance of Pro Forma Net Income Under SFAS 123: Old Economy Versus New Economy Firms (Manuscripts‪)‬

ABSTRACT This study examines the value relevance of pro forma net income prepared in accordance with SFAS 123 over the time period of 1997-2000 of 40 firms. Additionally, it compares the value relevance between companies classified as Old Economy versus those under the New Economy. It is motivated by the controversy surrounding the usefulness of pro forma net income disclosures using the fair value method to account for employee stock options. We find a significant negative correlation between pro forma net income and security returns. In addition, there is a significant difference in value relevance between Old Economy and New Economy stocks.