Are Investors Misled by Exclusions of Recurring Expenses from Non-GAAP Earnings?

122 Pages Posted: 8 Jul 2019 Last revised: 17 Jan 2020

See all articles by Oliver Mehring

Oliver Mehring

Paderborn University

Jens Mueller

Paderborn University

Soenke Sievers

Paderborn University

Christian Sofilkanitsch

Paderborn University

Date Written: January 8, 2020

Abstract

While non-GAAP reporting is under debate as managers may opportunistically inflate non-GAAP earnings, analytical research by Hirshleifer and Teoh (2003) proposes that limited attention causes mispricing when inappropriate items are excluded from non-GAAP earnings but will be reversed subsequently. Addressing this proposition empirically, we find that revisions upon the release of material restatements are most pronounced for firms that frequently inflated non-GAAP earnings through the exclusion of recurring expenses before the restatement announcement. Further, we document that investors reward aggressively reported non-GAAP earnings before the restatement announcement, but punish the same reporting choices in the post-restatement period. Overall, our findings suggest that investor attention, which increases after the restatement, enhances investors’ ability to see through the quality of non-GAAP exclusions.

Keywords: Non-GAAP reporting, investor attention, financial restatements, information content of earnings, firm value, overvaluation

JEL Classification: G1, K4, M4

Suggested Citation

Mehring, Oliver and Mueller, Jens and Sievers, Soenke and Sofilkanitsch, Christian, Are Investors Misled by Exclusions of Recurring Expenses from Non-GAAP Earnings? (January 8, 2020). Available at SSRN: https://ssrn.com/abstract=3415109 or http://dx.doi.org/10.2139/ssrn.3415109

Oliver Mehring

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Jens Mueller

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Soenke Sievers

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

HOME PAGE: http://www.upb.de/accounting

Christian Sofilkanitsch (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

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