Analysts’ Role in Shaping Non-GAAP Reporting: Evidence from a Natural Experiment
Review of Accounting Studies, Forthcoming
53 Pages Posted: 23 Sep 2018 Last revised: 9 Jan 2020
Date Written: October 31, 2019
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: Suggested Citation