Non-GAAP Disclosures and Investor Uncertainty

47 Pages Posted: 26 Feb 2021

See all articles by Lindsey A. Gallo

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Suhas A. Sridharan

Emory University - Goizueta Business School

Karen Ton

Indiana University

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: January 14, 2021

Abstract

We examine the association between I/B/E/S's disclosure of non-GAAP earnings and investor uncertainty around earnings announcements. On one hand, investor uncertainty may decrease with I/B/E/S's non-GAAP disclosure because these disclosures make investors aware of alternative performance measures for firm valuation and reduce the acquisition costs related to them. On the other hand, investor uncertainty may increase with I/B/E/S's non-GAAP disclosure because the opacity in how I/B/E/S determines non-GAAP earnings imposes additional integration costs on investors. Consistent with the latter effect dominating, we find that investor uncertainty is increasing in the amount of I/B/E/S's non-GAAP adjustments.

In contrast, managers' non-GAAP adjustments, which are accompanied with a reconciliation to GAAP earnings and are therefore relatively more transparent, are not associated with investor uncertainty around earnings announcements. These results expand our understanding of how different sources of non-GAAP information affect capital markets and highlight the nuanced role of information intermediaries in the non-GAAP disclosure environment.

Keywords: Non-GAAP Disclosures, Information Intermediaries, Earnings Announcements, Implied Volatility

JEL Classification: M40, M41, M48

Suggested Citation

Gallo, Lindsey A. and Sridharan, Suhas A. and Ton, Karen and Yohn, Teri Lombardi, Non-GAAP Disclosures and Investor Uncertainty (January 14, 2021). Available at SSRN: https://ssrn.com/abstract=3766358 or http://dx.doi.org/10.2139/ssrn.3766358

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7347648243 (Phone)

Suhas A. Sridharan (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Karen Ton

Indiana University ( email )

Kelley School of Business
1309 E. Tenth Street, HH5100
Bloomington, IN 47405
United States

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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