The Impact of the Disclosure of Non‐GAAP Earnings in Australian Annual Reports on Non‐Sophisticated Users

Abstract

at a GlanceThis study investigates the impact of non-GAAP earnings disclosure practices on nonsophisticated investors in Australia, given Australia's high investor participation rates, including those operating self-managed superannuation funds. The results show a positive association between the prominent disclosure of non-GAAP earnings information and the reliance of non-sophisticated investors on this information.The disclosure of non-GAAP earnings in Australian annual reports has risen steadily in recent years. These non-statutory earnings measures are generally disclosed in the unaudited section of the annual report and are not consistent with statutory profit as defined under generally accepted Australian accounting standards (GAAP). Recent research conducted in the United States has provided evidence that non-sophisticated investor decisions are influenced by the presence and prominence of non-GAAP earnings information. Further evidence suggests that investor perception changed after non-GAAP earnings disclosures became subject to regulation in that jurisdiction. Australia has high investor participation rates by international standards, including investors operating self-managed superannuation funds, resulting in a significant number of active individual investors. This study employs an experimental design to investigate the impact on non-sophisticated investors of the reporting of non-GAAP earnings information in addition to GAAP earnings information in Australian annual reports. The results of this study show a positive association between the prominent disclosure of non-GAAP earnings information and non-sophisticated investor reliance on this information. These results provide important evidence to Australian regulators as these narrative disclosures are not subject to regulation, in contrast to the United States where mandatory regulation has been in place since 2003.

Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals

“…However, there also seem to be cases where investors are misled by APM reporting (e.g., Johnson et al. 2014 ; Dilla et al. 2013 ; Frederickson and Miller 2004 ).…”

Future Cash Flow Predictability of Non‐IFRS Earnings: Australian Evidence

“…Despite the ongoing debate as to what motivates firms to disclose non-IFRS earnings, the literature provides consistent evidence that these earnings have a clear effect on investors' decision making. Experimental results show that non-IFRS earnings reporting affects inexperienced as well as sophisticated investors (Frederickson and Miller 2004;Elliott 2006;Andersson and Hellman 2007;Johnson et al 2014), while archival studies based on trade size conclude that it is mainly unsophisticated investors that react to non-IFRS earnings disclosure (Allee et al 2007;Bhattacharya et al 2007).…”

“…Experimental results show that non‐IFRS earnings reporting affects inexperienced as well as sophisticated investors (Frederickson and Miller ; Elliott ; Andersson and Hellman ; Johnson et al. ), while archival studies based on trade size conclude that it is mainly unsophisticated investors that react to non‐IFRS earnings disclosure (Allee et al. ; Bhattacharya et al.…”

Non-GAAP earnings: international overview and suggestions for future research

“…Thus, analysts can also be affected by these voluntary disclosures. Johnson et al (2014) perform an experiment in Australia where, like in Andersson and Hellman (2007), non-GAAP is positive, while the GAAP earnings are negative. They find that if non-GAAP earnings are disclosed in the narrative section of the annual report non-sophisticated investors, when asked to identify profitability measures, select this information.…”