What’s in a Name? Investors’ Reactions to Non-GAAP Labels

36 Pages Posted: 20 Sep 2021 Last revised: 24 Aug 2022

See all articles by Shannon Garavaglia

Shannon Garavaglia

University of Pittsburgh - Accounting Group

Multiple version iconThere are 2 versions of this paper

Date Written: August 23, 2022

Abstract

Using a mixed-methods approach, I investigate how the terms that firms use to label non-GAAP earnings interact with investors’ scrutiny of non-GAAP reporting to affect investors’ information search behavior and investment decisions. I first provide descriptive evidence on the non-GAAP labels used in practice, followed by a survey to understand what investors believe these labels convey about earnings quality. Finally, in an experiment, I find that investors who are more likely to scrutinize non-GAAP reporting are not affected by non-GAAP labels when deciding to seek out the non-GAAP reconciliation, and react positively to appropriately-used labels. However, investors who are less likely to scrutinize non-GAAP reporting rely on the cue provided by the label when deciding whether to seek out the non-GAAP reconciliation and are more likely to be misled by inappropriately-used labels. This study is informative to regulators, who have expressed concern over the mislabeling of non-GAAP measures, and to managers, who are often criticized for their misuse of discretion in non-GAAP reporting.

Keywords: Non-GAAP, information search, investor judgments, management credibility, experiment, non-professional investors

Suggested Citation

Garavaglia, Shannon, What’s in a Name? Investors’ Reactions to Non-GAAP Labels (August 23, 2022). Available at SSRN: https://ssrn.com/abstract=3925748 or http://dx.doi.org/10.2139/ssrn.3925748

Shannon Garavaglia (Contact Author)

University of Pittsburgh - Accounting Group ( email )

United States

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