How Consistency in Non-GAAP Earnings Affect Investors’ Judgements?

• In Event: Potpourri

Abstract

Theory suggests that the provision of voluntary disclosure is informative to investors, but prior empirical research largely focuses on investors’ reaction to the content of GAAP earnings disclosure. I extend the empirical literature on non-GAAP earnings disclosures by experimentally examining how investors react to a firm’s consistency pattern of benchmark performance on non-GAAP earnings holding constant other content in a firm’s earnings release. I explore two dimensions of non-GAAP earnings disclosures—how consistently non-GAAP earnings beat or miss its benchmarks (consistency) and whether clarity in exclusions is sufficient (ambiguity). I find that investors make more favorable judgements on firms’ future performance when a firm inconsistently beats its benchmarks, however, they are more likely to invest if a firm consistently beats its benchmarks over the three years. Using analysis of variance test, I find that investors do not care about the ambiguity in non-GAAP earnings disclosures when they incorporate non-GAAP earnings benchmark performance into their assessments. Our findings highlight the importance of examining non-GAAP disclosures both for researchers and for practitioners.

Author

• Meiying Hua, Kent State University