Non-GAAP Reporting Following Debt Covenant Violations
Review of Accounting Studies 24, no. 2 (2019): 629-664.
51 Pages Posted: 10 Mar 2015 Last revised: 6 Mar 2020
Date Written: November 1, 2018
We investigate whether firms change their non-GAAP reporting practices after debt covenant violations. We find that the likelihood that a firm will disclose non-GAAP earnings decreases and (for those that continue to disclose) the quality of non-GAAP reporting improves following covenant violations, consistent with stronger shareholder monitoring during this period of scrutiny. Consistent with increased monitoring following a debt covenant violation, cross-sectional analyses indicate that these changes in non-GAAP reporting are concentrated among firms with strong governance. Moreover, we find that investor demand for disclosure (proxied by analyst-provided non-GAAP performance metrics and EDGAR search volume) increases following a covenant violation. Collectively, our evidence is consistent with heightened investor scrutiny following covenant violations, and it casts doubt on the competing explanation that shareholders delegate monitoring to creditors following a covenant violation. Overall, our evidence provides new insights on the determinants of firms’ non-GAAP reporting practices and an alternative view about how debt covenant violations influence voluntary disclosure.
Keywords: Non-GAAP Earnings; Debt Contracting; Covenant Violation; Creditor Monitoring
JEL Classification: D83; G32; M40; M41
Suggested Citation: Suggested Citation