When Does Forecasting GAAP Earnings Entail Unreasonable Effort?
41 Pages Posted: 24 Jun 2020
Date Written: June 17, 2020
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: Suggested Citation