When Does Forecasting GAAP Earnings Entail Unreasonable Effort?

41 Pages Posted: 24 Jun 2020

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: June 17, 2020

Abstract

SEC rules require managers to reconcile their non-GAAP forecasts with the most directly comparable GAAP measure unless doing so would entail ‘unreasonable effort’. A large and growing number of managers invoke the unreasonable efforts exception to justify the omission of comparable GAAP forecasts. We analyze firms where managers invoke the unreasonable efforts exception and find that these firms are characterized by non-GAAP measures with significantly greater recurring expense exclusions. Our findings suggest that these firms opportunistically exploit the unreasonable efforts exception to avoid reconciling elevated non-GAAP forecasts to predictably lower GAAP earnings.

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? (June 17, 2020). 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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