Non-GAAP Earnings Disclosure and IPO Pricing
57 Pages Posted: 6 Jul 2016 Last revised: 25 Oct 2018
Date Written: October 21, 2018
We investigate the disclosure and prominence of non-GAAP (customized) earnings metrics in IPO prospectuses and how these disclosures affect IPO pricing. In contrast with already-public firms, we document an inverted U-shaped relation between IPO firms’ GAAP performance and the likelihood that they will disclose a non-GAAP metric, suggesting differing motivations for non-GAAP disclosure in the IPO setting. Our pricing tests indicate that IPOs of firms disclosing non-GAAP earnings metrics generally exhibit lower underpricing and that the disclosure of adjusted earnings information in the prospectus enables firms to minimize underpricing by economically significant amounts. We find, however, that this pricing effect depends on how issuers calculate the non-GAAP figure. Specifically, when prospectuses contain non-GAAP metrics with larger recurring exclusions (which are generally viewed to be more aggressive), issuers experience greater underpricing. Additional analyses suggest that this greater underpricing arises primarily from agency conflicts between issuers and underwriters.
Keywords: non-GAAP, IPOs, underpricing, price revision, prospectus, disclosure
JEL Classification: D84, G14, M41
Suggested Citation: Suggested Citation