Does Learning About Low GAAP Reporting Quality Change Investors' Perceptions of Aggressive Non-GAAP Reporting Choices?

53 Pages Posted: 8 Jul 2019 Last revised: 30 Apr 2021

See all articles by Oliver Mehring

Oliver Mehring

Paderborn University; TRR 266 Accounting for Transparency

Jens Mueller

Paderborn University

Soenke Sievers

Paderborn University; TRR 266 Accounting for Transparency

Christian Sofilkanitsch

Paderborn University; TRR 266 Accounting for Transparency

Date Written: March 11, 2020

Abstract

Material financial restatements reveal GAAP-based misreporting and thus are a strong signal of low GAAP reporting quality. We explore these reporting shocks and investigate whether heightened investor scrutiny of GAAP reporting quality after material restatements has a spillover effect on investors’ perceptions of aggressive non-GAAP reporting choices. We find that investors reward aggressive non-GAAP reporting choices before material restatements (i.e., ERC premium) but penalize the same reporting choices after material restatements (i.e., ERC discount). Furthermore, we document that short- and long-term market reactions to material restatements are more negative for firms that aggressively reported non-GAAP earnings before the announcement of material restatements. We provide evidence that heightened investor scrutiny of GAAP reporting quality affects investors’ perceptions of aggressive non-GAAP reporting choices. Finally, our findings are consistent with the idea that aggressive non-GAAP reporting choices misled investors before material restatement announcements.

Keywords: Non-GAAP reporting, investor scrutiny, financial restatements, information content of earnings, mispricing

JEL Classification: G1, K4, M4

Suggested Citation

Mehring, Oliver and Mueller, Jens and Sievers, Soenke and Sievers, Soenke and Sofilkanitsch, Christian, Does Learning About Low GAAP Reporting Quality Change Investors' Perceptions of Aggressive Non-GAAP Reporting Choices? (March 11, 2020). TRR 266 Accounting for Transparency Working Paper Series No. 1, 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

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Jens Mueller

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Soenke Sievers

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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