The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements

Huang, Qianyun; Skantz, Terrance R.

doi:10.1007/s11142-015-9345-8

Cited by 30 publications

(15 citation statements)

References 71 publications

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“…For example, (1) managers can systematically exclude one‐time items in calculating non‐GAAP earnings to provide a more accurate depiction of core performance (Bhattacharya et al., ; Curtis et al., ; Lougee & Marquardt, ); (2) investors respond more to non‐GAAP than to GAAP metrics, suggesting greater reliance on non‐GAAP information than on GAAP information (e.g., Bhattacharya et al., ; Bradshaw & Sloan, ); and (3) researchers have found evidence suggesting that investors are not mislead by non‐GAAP reporting (Johnson & Schwartz, ), particularly in the post‐Reg. G time period (Chen, ; Huang & Skantz, ; Jennings & Marques, ; Whipple, ; Zhang & Zheng, ). More recently, Black et al.…”

Section: Regulatory Standard Setting and Academic Foundationsmentioning

confidence: 99%

Non‐GAAP reporting: Evidence from academia and current practice

Black

Christensen

Ciesielski

et al. 2018

Business Fin & Account

184

148

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The number of firms reporting earnings on a non-GAAP basis has increased dramatically over the last decade, and non-GAAP reporting is now commonplace in capital markets. This proliferation of non-GAAP reporting has renewed both regulators' and standard setters' interests in these alternative performance metrics. For example, the SEC, FASB, and IASB have all recently questioned what this increasing reporting trend means for IFRS-and US-GAAP-based reporting and whether these measures are misleading to investors. This increasing focus on non-GAAP metrics motivates us to synthesize the nearly two decades of research on non-GAAP reporting to provide insights on what academics have learned to date about this reporting practice. Then, we utilize a novel dataset of detailed non-GAAP disclosures to provide new descriptive evidence on current trends in non-GAAP reporting and its recent proliferation. Finally, we discuss important questions for future researchers to consider in moving the literature forward. K E Y W O R D Snon-GAAP earnings, regulation, standard setting INTRODUCTIONManagers, financial analysts, investors, lenders, compensation committees, and other stakeholders often evaluate a company's earnings performance using metrics other than GAAP-based net income. These stakeholders generally start with GAAP earnings and back out (or exclude) earnings components that they deem to be transitory or noncash. They argue that these excluded items are less relevant for assessing firm performance and that the "non-GAAP" performance number is more appropriate for their intended purposes. The growth in these non-GAAP metrics over the past 20 years reflects a widespread acceptance of non-standard performance metrics as a way to evaluate firm performance.Although skeptics have frequently viewed non-GAAP disclosure as a threat to the traditional GAAP-based income statement, regulators recognize that non-GAAP metrics can be informative to investors and have laid the groundwork for firms to disclose these metrics in a transparent manner. Standard setters and regulators have recently renewed J Bus Fin Acc. 2018;45:259-294. wileyonlinelibrary.com/journal/jbfa

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Section: Regulatory Standard Setting and Academic Foundationsmentioning

confidence: 99%

Non‐GAAP reporting: Evidence from academia and current practice

Black

Christensen

Ciesielski

et al. 2018

Business Fin & Account

184

148

View full text Add to dashboard Cite

show abstract

“…Fourth, our paper contributes to research on non-GAAP earnings and information asymmetry. Huang and Skantz (2016) study the relationship between non-GAAP disclosure and information asymmetry. They find lower bid-ask spreads for firms reporting non-GAAP earnings.…”

Section: Introductionmentioning

confidence: 99%

Information Environment Consequences of SEC Non-GAAP Comment Letters

2017

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“…However, our value relevance evidence is more consistent with the interpretation that existing benchmark-indicators of exclusion quality perform poorly and less consistent with the interpretation that persistence for future earnings is a poor means of assessing exclusion quality. 8 reduces information asymmetry (e.g., Huang and Skantz 2016). This evidence is consistent with managers systematically excluding irrelevant items in calculating non-GAAP earnings to provide a superior metric of firm performance (e.g., Black et al 2017;Entwistle et al 2005;Kyung et al 2016).…”

Section: Managers' Motivation For Providing Non-gaap Eps Metricsmentioning

confidence: 64%

An Empirical Investigation of Non-GAAP Exclusion Quality Indicators.

Wallace¹

2020

Preprint

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We examine commonly used indicators of non-GAAP exclusion quality and find they perform poorly at capturing low-quality (i.e., more persistent) exclusions. Further, low-quality non-GAAP earnings, as identified by any of the indicators used in prior research, are more value relevant than GAAP earnings. We propose a new indicator that performs better at identifying low-quality non-GAAP exclusions. Specifically, we consider cases where GAAP earnings are highly persistent (e.g., low-magnitude unexpected earnings; Freeman and Tse 1992), but managers report non-GAAP earnings anyway. In these cases, exclusions have strong negative persistence for future operating earnings/cash flows, suggesting exclusions are of low quality. Further, the GAAP ERC is significantly greater than the non-GAAP ERC. In total, our results suggest existing indicators of low-quality non-GAAP earnings are of little use and that researchers and regulators should focus on firms that disclose non-GAAP earnings despite high quality GAAP earnings.

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The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements

Cited by 30 publications

References 71 publications

Non‐GAAP reporting: Evidence from academia and current practice

Non‐GAAP reporting: Evidence from academia and current practice

Information Environment Consequences of SEC Non-GAAP Comment Letters

An Empirical Investigation of Non-GAAP Exclusion Quality Indicators.

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