Analysts’ Role in Shaping Non-GAAP Reporting: Evidence from a Natural Experiment

Review of Accounting Studies, Forthcoming

SMU Cox School of Business Research Paper No. 18-32

53 Pages Posted: 23 Sep 2018 Last revised: 9 Jan 2020

See all articles by Theodore E. Christensen

Theodore E. Christensen

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

Enrique Gomez

University of Georgia

Matthew Ma

Southern Methodist University (SMU)

Jing Pan

Southern Methodist University (SMU) - Accounting Department

Date Written: October 31, 2019

Abstract

We examine how exogenous changes in analyst coverage influence the likelihood that managers will voluntarily disclose customized (non-GAAP) performance metrics and the relative quality of their non-GAAP reporting. Specifically, we use a quasi-natural-experimental setting in which brokerage firms terminate analyst coverage and find that, following an unanticipated decrease in analyst coverage, managers are more likely to disclose non-GAAP performance metrics. We also find that managers become more aggressive in their disclosure choices and that the quality of their non-GAAP exclusions decreases after analysts terminate coverage. These effects are more pronounced among firms losing an analyst with greater ability and firms with weaker corporate governance. Overall, our evidence indicates that analysts play a monitoring role with respect to managers' non-GAAP disclosures and that managers become more aggressive in their non-GAAP reporting following an exogenous decline in analysts’ influence.

Keywords: Non-GAAP reporting, analyst coverage, information asymmetry, external monitoring

JEL Classification: M41, G14, G30

Suggested Citation

Christensen, Theodore E. and Gomez, Enrique and Ma, Matthew and Pan, Jing, Analysts’ Role in Shaping Non-GAAP Reporting: Evidence from a Natural Experiment (October 31, 2019). Review of Accounting Studies, Forthcoming; SMU Cox School of Business Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3242271 or http://dx.doi.org/10.2139/ssrn.3242271

Theodore E. Christensen (Contact Author)

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

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Enrique Gomez

University of Georgia ( email )

Athens, GA 30602-6254
United States

Matthew Ma

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Jing Pan

Southern Methodist University (SMU) - Accounting Department ( email )

United States

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