Non-GAAP Earnings Disclosure and the Valuation of IPOs

55 Pages Posted: 6 Jul 2016 Last revised: 16 Apr 2020

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

Thomas D. Steffen

Yale University School of Management

Andrea Menini

University of Padova

Date Written: April 14, 2020

Abstract

We investigate the disclosure and prominence of non-GAAP earnings metrics in IPO prospectuses and how these disclosures affect IPO valuation. In contrast to already-public firms, we find 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 valuation tests indicate that IPO firms disclosing non-GAAP earnings metrics generally exhibit higher offer values and less undervaluation during the IPO process and that the disclosure of adjusted earnings information in the prospectus enables them to minimize undervaluation by economically significant amounts. We find, however, that these valuation effects depend on how issuers calculate the non-GAAP figure. Specifically, our results indicate that IPOs are more undervalued when prospectuses contain non-GAAP metrics with larger recurring exclusions (which are less justifiable and generally viewed to be more aggressive). Additional analyses of post-IPO stock returns suggest that aggressive recurring exclusions are appropriately discounted during the IPO process.

Keywords: non-GAAP, IPOs, prospectus, disclosure

JEL Classification: D84, G14, M41

Suggested Citation

Brown, Nerissa C. and Christensen, Theodore E. and Steffen, Thomas D. and Menini, Andrea, Non-GAAP Earnings Disclosure and the Valuation of IPOs (April 14, 2020). 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

Thomas D. Steffen

Yale University School of Management ( email )

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

Andrea Menini

University of Padova ( email )

Via 8 Febbraio 1848, 2
Padova, Vicenza 35122
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
537
Abstract Views
2,660
rank
55,862
PlumX Metrics