Disclosure Prominence and the Quality of Non-GAAP Earnings

48 Pages Posted: 3 Jan 2019 Last revised: 17 Jan 2019

See all articles by Jason V. Chen

Jason V. Chen

University of Illinois at Chicago

Kurt H. Gee

Penn State; Financial Accounting Standards Board (FASB)

Jed J. Neilson

Penn State University - Smeal College of Business

Date Written: January 15, 2019

Abstract

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

Suggested Citation

Chen, Jason V. and Gee, Kurt H. and Neilson, Jed J., Disclosure Prominence and the Quality of Non-GAAP Earnings (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=3304172 or http://dx.doi.org/10.2139/ssrn.3304172

Jason V. Chen

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Kurt H. Gee (Contact Author)

Penn State ( email )

201 Old Main
University Park
State College, PA 16802
United States

Financial Accounting Standards Board (FASB) ( email )

401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
United States

Jed J. Neilson

Penn State University - Smeal College of Business ( email )

376 Business Building
State College, PA PA 16802
United States

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