Information Environment Consequences of SEC Non-GAAP Comment Letters
64 Pages Posted: 3 Oct 2017 Last revised: 26 Apr 2018
Date Written: April 15, 2018
This study examines how changes in firms’ non-GAAP disclosures, prompted by SEC comment letters, affect information asymmetry and the informativeness of non-GAAP earnings. SEC non-GAAP earnings comments generally address four issues: (1) full non-GAAP income statements, (2) non-GAAP to GAAP reconciliation, (3) explanation of non-GAAP earnings, and (4) presentation of non-GAAP earnings. We find that information asymmetry increases and the informativeness of non-GAAP earnings decreases after firms comply with SEC requests to stop disclosing full non-GAAP income statements. Additional analyses reveal that analyst forecast dispersion and error increase after firms stop disclosing full non-GAAP income statements. Our results are robust to difference-in-difference analyses on a matched control sample and a variety of other robustness checks and falsification analyses. We find little or no evidence of changes in information asymmetry or non-GAAP earnings informativeness following the resolution of comment letters addressing the other three issues. Overall, our evidence is consistent with managers’ arguments indicating that non-GAAP income statements provide valuable information to market participants, including analysts.
Keywords: SEC, Comment Letters, Regulation, Non-GAAP
JEL Classification: M41, M48
Suggested Citation: Suggested Citation