Disclosure Prominence and the Quality of Non‐GAAP Earnings

Journal of Accounting Research, Volume 59, Issue 1

Posted: 18 Mar 2021

See all articles by Jason V. Chen

Jason V. Chen

University of Illinois at Chicago

Kurt H. Gee

Penn State - Smeal College of Business

Jed J. Neilson

Penn State University - Smeal College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2021

Abstract

The SEC prohibits the presentation of non‐GAAP measures before corresponding GAAP measures; however, a large proportion of non‐GAAP reporters present non‐GAAP EPS before GAAP EPS in their earnings announcements. This noncompliance raises questions about whether firms use prominence to highlight higher or lower quality non‐GAAP information. For firms reporting non‐GAAP EPS between 2003 and 2016, prominent non‐GAAP EPS is associated with higher quality non‐GAAP reporting. Further tests reveal that nonregulatory incentives, rather than regulatory costs, explain this relation. Specifically, prominence is associated with higher quality non‐GAAP reporting in settings where prominence is not regulated, investors ignore prominence when non‐GAAP reporting quality is lower, and the minority of firms using prominence to mislead exhibit characteristics associated with weaker investor monitoring. Overall, we provide evidence that regulatory noncompliance can reflect an intent to inform, and that most firms use prominence to highlight higher quality non‐GAAP information despite prohibitive regulation.

Keywords: non-GAAP earnings; disclosure prominence; reporting quality; disclosure regulation; regulatory compliance; voluntary disclosure

JEL Classification: G18, G41, M40, M41, M48

Suggested Citation

Chen, Jason V. and Gee, Kurt H. and Neilson, Jed J., Disclosure Prominence and the Quality of Non‐GAAP Earnings (March 1, 2021). Journal of Accounting Research, Volume 59, Issue 1, Available at SSRN: https://ssrn.com/abstract=3806684

Jason V. Chen

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Kurt H. Gee (Contact Author)

Penn State - Smeal College of Business ( email )

354 Business Building
University Park, PA 16802
United States

Jed J. Neilson

Penn State University - Smeal College of Business ( email )

376 Business Building
State College, PA PA 16802
United States

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