Litigation Risk and Non-GAAP Reporting

• In Event: Non-GAAP Reporting

Abstract

Non-GAAP reporting is an important and controversial topic that is part of an ongoing debate between managers, investors, and regulators regarding whether these disclosures portray more informative or overly optimistic performance information. We contribute new empirical evidence on this debate by providing the first rigorous examination of the association between litigation risk and non-GAAP reporting. Specifically, we investigate how changes in circuit-specific levels of litigation risk influence firms’ propensity to disclose non-GAAP performance metrics. We find that decreases in litigation risk are associated with increases in the frequency of non-GAAP reporting. We use a quasi-experimental setting in which U.S. federal appeals court rulings result in significant changes in litigation risk and employ a difference-in-differences design to explore how these circuit-specific shocks influence firms’ propensity to provide non-GAAP performance metrics. We find that firms increase (decrease) their non-GAAP reporting activity when litigation risk decreases (increases). We also provide evidence consistent with Reg G reducing differences in non-GAAP reporting litigation risk between circuits, suggesting the regulation created a non-GAAP disclosure safe harbor. We conclude by providing evidence regarding how our litigation risk shocks relate to other litigation risk measures to inform future researchers examining or controlling for litigation risk.

Authors

• Richard Arnold Cazier, University of Texas at El Paso

• Theodore E Christensen, University of Georgia

• Kenneth Merkley, Cornell University

• John S. Treu, Pace University