Non-GAAP Earnings and Stock Price Crash Risk

51 Pages Posted: 25 Sep 2019 Last revised: 26 Nov 2019

See all articles by Charles Hsu

Charles Hsu

Hong Kong University of Science & Technology

Rencheng Wang

Singapore Management University - School of Accountancy

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: September 16, 2019

Abstract

Prior research concludes that stock price crash risk is primarily attributable to managers’ withholding of bad news from investors. We extend this literature by investigating whether crash risk can also occur when managers disclose additional information via non-GAAP reporting, which downplays reported bad news by re-directing investors’ attention to other, more positive aspects of performance. We find that the likelihood of crash risk is higher when managers have reported non-GAAP earnings more frequently during the past year. We also find that managers appear to use non-GAAP reporting as a substitute for the more common reason for crash risk in prior research–withholding bad news. Moreover, we find that the association between non-GAAP disclosure and crash risk increases in periods when managers are likely more aggressive in their non-GAAP reporting. Finally, we use a regulatory shock as a quasi-natural experiment to mitigate endogeneity concerns.

Keywords: Non-GAAP earnings, Stock price crash risk, Disclosure, Regulation

JEL Classification: D82, G12, G17, G18, M41

Suggested Citation

Hsu, Charles and Wang, Rencheng and Whipple, Benjamin C., Non-GAAP Earnings and Stock Price Crash Risk (September 16, 2019). Available at SSRN: https://ssrn.com/abstract=3454799 or http://dx.doi.org/10.2139/ssrn.3454799

Charles Hsu (Contact Author)

Hong Kong University of Science & Technology ( email )

Hong Kong
Hong Kong
852-2358-7568 (Phone)
852-2358-1693 (Fax)

Rencheng Wang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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