Are pre-restatement non-GAAP reporting choices determinants of market reactions to material GAAP restatements?

106 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

TRR 266 Accounting for Transparency; Paderborn University

Christian Sofilkanitsch

Nazarbayev University - Graduate School of Business; Paderborn University; TRR 266 Accounting for Transparency

Date Written: March 11, 2020

Abstract

We examine whether firms’ decision to report non-GAAP earnings before material GAAP restatements influences the market’s response to these restatements. Our results demonstrate that market reactions to material GAAP restatements are less negative when companies (a) voluntarily disclosed non-GAAP earnings alongside GAAP earnings (+1.5 percentage points), and (b) transformed a GAAP loss into a non-GAAP profit (+2.3 percentage points) before the restatement. However, we observe more negative market reactions when management excluded more expenses than analysts (–3.2 percentage points). Our findings indicate that pre-restatement non-GAAP reporting choices can have opposing effects on how investors perceive financial reporting quality events. Additionally, voluntary non-GAAP disclosure may buffer against negative market reactions to material GAAP restatements. Ultimately, we find that investors alter their treatment of non-GAAP earnings following a material GAAP restatement, suggesting a cascading (i.e., spillover) effect between the perceived quality of GAAP and non-GAAP reporting.

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 Sofilkanitsch, Christian, Are pre-restatement non-GAAP reporting choices determinants of market reactions to material GAAP restatements? (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)

Nazarbayev University - Graduate School of Business ( email )

Kazakhstan

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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