The Disclosure of Non-GAAP Earnings Following Regulation G: An Analysis of Transitory Gains

Abstract

SYNOPSIS We investigate how managers report one-time gains resulting from legal settlements and insurance recoveries in press releases following Regulation G. Regulation G may have had the unintended consequence of allowing managers to omit mention of these transitory gains, resulting in higher reported performance absent non-GAAP disclosure. We find that while managers generally provide some information about transitory gains in the earnings announcement, there is a large amount of variation in the granularity of the detail. For example, the vast majority of managers (88.5 percent) mention the gain in the earnings announcement, but few (34 percent) report non-GAAP earnings per share summary figures explicitly excluding transitory gains. This percentage is significantly lower than pre-Regulation G, where approximately 62 percent of firms reported non-GAAP earnings per share excluding the transitory gain. Interestingly, we find that gains are less likely to be carved out of earnings when there are no concurrent transitory losses, providing some evidence that there continues to be an opportunistic component of non-GAAP reporting following Regulation G. Data Availability: Data are available from sources identified in the text.

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

“…G have reduced the incidence of opportunistic non-GAAP disclosures. Baumker, Biggs, McVay, and Pierce (2014) and Curtis, McVay, and Whipple (2014) find that after Reg. G, some firms opportunistically refrain from reporting non-GAAP earnings figures when GAAP earnings are affected by transitory gains.…”

“…Even though Choi et al (2007) find evidence suggesting that manager-disclosed non-GAAP metrics are generally intended to better reflect sustainable operating performance in the United Kingdom, Marques (2010);and Entwistle, Feltham, and Mbagwu (2005) find that some managers may disclose non-GAAP performance metrics for opportunistic reasons. Baumker et al (2014) and Curtis et al (2014) find that after…”

“…However, they also find evidence consistent with a decrease in the quality of special item exclusions in the post-intervention period. Curtis et al (2014) and Baumker et al (2014) also document opportunistic non-GAAP behavior after Reg. G. Thus, there is mixed evidence about the impact of regulation on non-GAAP reporting.…”

Alternative Performance Measures and ESMA Guidelines: Improving Stakeholders’ Communication

“…In the academic field, we find numerous studies after 2005 (Shoenberg, 2006;Marques, 2006Marques, , 2010Heflin & Hsu, 2008;Jennings & Marques, 2011, Pham et al, 2011Curtis et al, 2014;Baumker et al, 2014).…”

How Does Using a Mobile Device Change Investors’ Reactions to Firm Disclosures?

“…Therefore suppressing non-GAAP earnings per share could increase investors' inferences about persistent earnings. I choose an insurance settlement because it is a common transitory gain described in disclosure narratives(Baumker et al [2014],Curtis, McVay, and Whipple [2014]).…”