Non-GAAP Reporting and Investor Attention: Are Investors Misled by Exclusions of Recurring Expenses from Non-GAAP Earnings before Restatement Announcements?

65 Pages Posted: 8 Jul 2019 Last revised: 12 Jul 2019

See all articles by Oliver Mehring

Oliver Mehring

Paderborn University

Jens Mueller

Paderborn University

Soenke Sievers

Paderborn University

Christian Sofilkanitsch

Paderborn University

Date Written: July 10, 2019

Abstract

Non-GAAP reporting is under debate as managers may opportunistically inflate non-GAAP earnings. By separating firms into groups based on exclusions of recurring expenses before material restatements occur this paper investigates whether market participants are misled based on ex-ante non-GAAP reporting. The results show a decline in cumulative abnormal returns (–11.8% aggressive non-GAAP Reporting vs. –2.7% non-aggressive non-GAAP reporting), reduction in overvaluation (–22.18% vs. no decline) and losses in the earnings response coefficient (–51.8% vs. no significant decline) for firms with prior aggressive non-GAAP reporting. Further, we document that investors are less responsive to aggressively reported non-GAAP earnings ex-post, indicating that increased attention enhances investor’s ability to see through the quality of non-GAAP exclusions.

Keywords: non-GAAP reporting, 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, Non-GAAP Reporting and Investor Attention: Are Investors Misled by Exclusions of Recurring Expenses from Non-GAAP Earnings before Restatement Announcements? (July 10, 2019). 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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