Regulation G requires all companies to quantitatively reconcile pro forma earnings with
GAAP earnings. This paper provides three findings related to the impact of reconciliations
on mispricing of pro forma earnings. First, prior to Reg G, we find that mispricing
of pro forma earnings is limited to firms with low reconciliation quality. There is no
evidence of mispricing for firms with high reconciliation quality. Second, we find no
evidence of mispricing after Reg G. Third, there is a cross-Reg G reduction of mispricing
for firms whose reconciliation quality improves, and there continues to be no mispricing
for firms that have high reconciliation quality both before and after Reg G. Together, our
results support the notion that better reconciliations reduce the extent of mispricing