When Does Forecasting GAAP Earnings Entail Unreasonable Effort?

51 Pages Posted: 24 Jun 2020 Last revised: 3 Aug 2021

See all articles by Henry Laurion

Henry Laurion

University of Colorado at Boulder - Department of Accounting

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: July 15, 2021

Abstract

SEC rules require managers to reconcile their non-GAAP earnings forecasts with the most directly comparable GAAP forecasts unless doing so would entail ‘unreasonable effort.’ A significant number of managers rely on the unreasonable efforts exception to justify the omission of comparable GAAP forecasts. We analyze firms that rely on the unreasonable efforts exception and find that their non-GAAP earnings forecasts are more likely to exclude significant recurring expenses that are not excluded by analysts. Our results suggest that almost a third of managers exploit the unreasonable efforts exception to exclude significant recurring expenses from their earnings guidance.

Keywords: Non-GAAP Earnings, Earnings Guidance, Opportunistic Behavior, Unreasonable Effort.

JEL Classification: M41, C23, D21, G32

Suggested Citation

Laurion, Henry and Sloan, Richard G., When Does Forecasting GAAP Earnings Entail Unreasonable Effort? (July 15, 2021). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3613439 or http://dx.doi.org/10.2139/ssrn.3613439

Henry Laurion

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Richard G. Sloan (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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