Non-GAAP Earnings Disclosure and IPO Pricing

57 Pages Posted: 6 Jul 2016 Last revised: 25 Oct 2018

See all articles by Nerissa C. Brown

Nerissa C. Brown

University of Illinois at Urbana-Champaign

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Andrea Menini

University of Padua

Thomas D. Steffen

Yale University School of Management

Date Written: October 21, 2018

Abstract

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

Brown, Nerissa C. and Christensen, Theodore E. and Menini, Andrea and Steffen, Thomas D., Non-GAAP Earnings Disclosure and IPO Pricing (October 21, 2018). Available at SSRN: https://ssrn.com/abstract=2803795 or http://dx.doi.org/10.2139/ssrn.2803795

Nerissa C. Brown (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Andrea Menini

University of Padua ( email )

Via 8 Febbraio 1848, 2
Padova, 35122
Italy

Thomas D. Steffen

Yale University School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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