Disclosure Prominence and the Quality of Non-GAAP Earnings
48 Pages Posted: 3 Jan 2019 Last revised: 17 Jan 2019
Date Written: January 15, 2019
Despite regulation prohibiting the practice, 36 percent of recent non-GAAP reporters disclose non-GAAP earnings more prominently than GAAP earnings in earnings announcements. The prominence of non-GAAP earnings is regulated due to concerns that investors may place undue reliance on more prominent non-GAAP information irrespective of its quality. Using a large sample of non-GAAP reporters between 2003 and 2016, we find that more prominent non-GAAP earnings is associated with: (1) higher quality non-GAAP earnings, (2) a stronger initial response by investors, and (3) attenuated post-announcement drift. We find similar evidence that prominence reflects higher quality in settings where non-GAAP prominence is not regulated, which suggests that capital market incentives discipline managers to use prominence to inform rather than to mislead. Our findings suggest that concerns about on-average misuse of non-GAAP prominence may be overstated and that managers use prominence to inform investors even in the face of prohibitive regulation.
Keywords: Non-GAAP; Prominence; Regulation S-K; Noncompliance
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