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

• 成果类型: Article
• 署名作者: Garavaglia, Shannon
• 署名单位: Pennsylvania Commonwealth System of Higher Education (PCSHE); University of Pittsburgh
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12829
• 发表日期: 2023
• 页码: 897-924
• 关键词: pro forma; street earnings; reflect changes; disclosure; Managers; Informativeness

摘要

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. This study informs regulators, who have expressed concern over the mislabeling of non-GAAP measures, and managers, who are often criticized for their misuse of discretion in non-GAAP reporting. 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, drawing on theory from psychology, I predict and then find in an experiment 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. For regulators, these findings validate concerns related to the mislabeling of non-GAAP measures and suggest increased non-GAAP scrutiny helps counteract mislabeling. For managers, these findings suggest investors react favorably to the appropriate use of discretion in non-GAAP reporting.