Non-GAAP Earnings and Stock Price Crash Risk

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