Joint Meeting of the Mid-Atlantic and Northeast Regions

Non-GAAP Reporting in the Presence of Predatory Threats from Product Market Peers

• In Event: Financial Reporting and EM

Abstract

This paper examines the role played by strategic interactions among product market
peers in a rival’s non-GAAP reporting decisions. Predatory threats against a rival are
an explicit form of product market threats, involving both intense price discounts and
aggressive advertising campaigns. We posit that managers have disclosure incentives
to signal their ability to withstand predatory threats and that the impact of the threats on
non-GAAP disclosures depends on dynamic aspects of firm rivalry. By identifying
potential prey as firms facing a high level of product market dynamics in the presence
of financial constraints, we find that the persistence of non-GAAP earnings exclusions
is higher for potential prey firms than for non-prey firms. We also find that potential
prey’s tendency to exclude more recurring items is stronger for firms operating in a
Cournot (i.e., substitutive) competitive structure and for firms receiving more attention
from their peers. Finally, we find that the release of non-GAAP earnings metrics by
potential prey decreases the risk of delisting, consistent with the real effects of non-
GAAP reporting. Overall, our study yields new insights into the strategic nature of non-
GAAP reporting by providing evidence that managers consider product market rivalry
when making non-GAAP exclusion decisions.

Authors

• Hyunkwon Cho, Sungkyunkwan University

• Robert Genehung Kim, University of Massachusetts-Boston

• Sangwan Kim, University of Massachusetts-Boston

• Jay Junghun Lee, University of Massachusetts Boston