Non-GAAP Earnings and Stock Price Crash Risk

58 Pages Posted: 25 Sep 2019 Last revised: 6 Oct 2021

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: March 3, 2021

Abstract

We investigate whether non-GAAP earnings disclosures increase stock price crash risk. Consistent with non-GAAP disclosures allowing managers to inflate investors’ perceptions about firm performance, our results indicate that income increasing non-GAAP reporting increases crash risk. We also find that managers can use non-GAAP reporting as a substitute for earnings management (the traditional explanation for crashes) to withhold bad news from investors. Finally, we find a positive association between non-GAAP reporting and the likelihood of subsequent events that can trigger a crash. Overall, our evidence is consistent with some non-GAAP disclosures exposing investors to risks of large and sudden price declines.

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 (March 3, 2021). 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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