Impression Management and Non-GAAP Reporting in Earnings Announcements (original) (raw)

The Impact of Media Attention on the Use of Alternative Earnings Measures

Abacus, 2010

The practice of reporting earnings measures that deviate from generally accepted accounting principles (non-GAAP measures) has received negative attention in the media. Regulators argue in favour of reporting GAAP earnings measures and utter their concerns that investors may be misled by the use of non-GAAP measures. In a period of increased regulatory concern for these reporting practices, we explore whether there has been a shift away from the use of non-GAAP metrics. We analyse a sample of earnings press releases in the period 1999-2004 from companies listed at Euronext Amsterdam. Our findings indicate that reporting non-GAAP measures is a common practice and that the frequency of reporting non-GAAP earnings measures has increased despite the concerns voiced by regulators. On the other hand, investors seem to have become more hesitant towards the use of alternative earnings measures for their decision-making. Our findings suggest that investors find non-GAAP measures informative before 2003, but they turn away from these measures in the following years and price GAAP earnings metrics instead. Together, these findings suggest that the negative media attention for non-GAAP measures has influenced the perception of investors, but not of managers.

Earnings and Impression Management in Financial Reports: The Case of CEO Changes

SSRN Electronic Journal, 2000

This article examines earnings management, as well as the presentational format of graphs (impression management) in the financial reports of sixtythree Australian listed public companies that changed chief executive officers (CEOs). Prior U.S. evidence generally suggests downward earnings management in the year of senior management changes and upward earnings management in the following year . We argue that new managers not only have incentives to manage earnings but also have similar incentives to manipulate the impressions created by graphs in financial reports. Examining earnings and impression management at the same time also provides an opportunity to distinguish between alternative explanations for any observed earnings management. In the year of CEO change, we hypothesize and find evidence of downward earnings management and some limited evidence of unfavourable impression management of the key financial variables (KFVs) graphed. As posited, we find evidence of upward earnings management and some evidence of favourable impression management in the year after a CEO change. These results are strongest for the subsample in which the CEO change was prompted by a resignation rather than a retirement.

Beating Strategic Earnings Benchmarks with Non-GAAP Figures: International Evidence*

SSRN Electronic Journal, 2000

This study explores international differences in the use of one non-GAAP earnings measures to meet strategic earnings benchmarks. We hand-collect information on non-GAAP disclosures from earnings announcements press releases and find that the majority of firms report more than one non-GAAP measure in press releases.

Non-GAAP Earnings and the Earnings Quality Trade-off

SSRN Electronic Journal

ABSTRACT Using a large sample of earnings press releases by Australian firms, we compare multiple attributes of non-GAAP earnings measures with their closest GAAP equivalent. We find that, on average, non-GAAP earnings are more persistent, smoother, more value-relevant, and have higher predictive power than their closest GAAP equivalent. However, the same set of non-GAAP earnings disclosures are also less conservative and less timely than their closest GAAP equivalent. The results are consistent with non-GAAP earnings measures reflecting a reversal of the trade-off between the valuation and stewardship roles of accounting inherent in accounting standards and the way they are applied. We also find that differences in several of these attributes between GAAP and non-GAAP earnings are more evident in larger firms, firms with lower market-to-book ratios, firms with a higher proportion of independent directors and firms that report profits rather than losses. Our evidence is consistent with the argument that accounting standards impose significant amounts of conditional conservatism at some cost to the valuation role of accounting information. Non-GAAP earnings measures can therefore be seen as a response to the challenges faced by a single GAAP performance measure in satisfying the competing demands of value relevance and stewardship. Brown, L., and K. Sivakumar. 2003. Comparing the value relevance of two operating income measures. Review of Accounting Studies 8 (4):561-572. Brown, P., S. Taylor, and T. Walter. 1999. The impact of statutory sanctions on the level and information content of voluntary corporate disclosure. Abacus 35 (2):138-162. Bushman, R., Q. Chen, E. Engel, and A. Smith. 2004. Financial accounting information, organizational complexity and corporate governance systems.

Earnings management and the quality of non-financial reporting in a regulated context

Corporate Governance and Sustainability Review, 2021

This research aims to study the relationship between firms’ accounting earning management practices and the quality of non-financial information disclosed in their annual reports. It is part of the ongoing debate on the reality or symbolism of corporate social responsibility (CSR) practices of companies and their transparency in this area (Buertey, Sun, Lee, & Hwang, 2019; Bozzolan, Fabrizi, Mallin, & Michelon, 2015; Prior, Surroca, & Tribo, 2008; Riahi-Belkaoui, 2003). We apply generalized least squares (GLS) regression on panel data obtained by a content analysis of annual reports of French SBF 120 listed firms, for the 2012 to 2015 period. The study confirms that upward earnings management led to the disclosure of more mandatory environmental information, but no effect is detected on their objectivity. Environmental disclosures contribute to drawing an image of regulatory compliance and divert stakeholders’ attention from the opportunistic discretionary intervention on financial ...

A Literature Review on Impression Management Techniques Usage in Financial Reporting

2017

Impression management is a concept that has been developed in the field of social psychology and has initially been used in individual behaviour analysis. With time the concept broadened and has found its usage in the field of economics, especially in the financial reporting domain. Generally, impression management can be described as usage of certain reporting techniques with the specific aim of improving image of the company among public. This topic is rather appealing and relevant in the time period following the global financial crisis and in time of increased global competition among companies. In this paper the authors will present a literature review of existing research on the topic of impression management. Various impression management techniques used by companies in financial reporting will be explored. Special accentuation will be made on presentation of distinctions found by research studies on impression management techniques usage in companies of various samples (for ...

Investor reaction to strategic emphasis on earnings numbers: An empirical study

Contemporary Economics, 2013

We analyze the earnings information and stock prices of S&P500 firms and find that investors following S&P500 stocks (i) respond more to pro forma earnings than to GAAP earnings, (ii) respond to an emphasis on pro forma earnings, and (iii) are fixated on pro forma earnings. We provide the first direct evidence that a strategic emphasis on earnings numbers may affect return volatility. Further, our results do not support the argument that a larger investor response to Street earnings might be driven by large differences between the Street numbers and GAAP numbers.

Information Environment Consequences of SEC Non-GAAP Comment Letters

SSRN Electronic Journal, 2017

This study examines how changes in firms' non-GAAP disclosures, prompted by SEC comment letters, affect information asymmetry and the informativeness of non-GAAP earnings. SEC non-GAAP earnings comments generally address four issues: (1) full non-GAAP income statements, (2) non-GAAP to GAAP reconciliation, (3) explanation of non-GAAP earnings, and (4) presentation of non-GAAP earnings. We find that information asymmetry increases and the informativeness of non-GAAP earnings decreases after firms comply with SEC requests to stop disclosing full non-GAAP income statements. Additional analyses reveal that analyst forecast dispersion and error increase after firms stop disclosing full non-GAAP income statements. Our results are robust to difference-indifference analyses on a matched control sample and a variety of other robustness checks and falsification analyses. We find little or no evidence of changes in information asymmetry or non-GAAP earnings informativeness following the resolution of comment letters addressing the other three issues. Overall, our evidence is consistent with managers' arguments indicating that non-GAAP income statements provide valuable information to market participants, including analysts.

Market reaction to Non-GAAP Earnings around SEC regulation

Journal of Contemporary Accounting & Economics

This paper examines the consequences of the non-GAAP reporting resulting from Regulation G as required by Section 401(b) of the Sarbanes-Oxley Act of 2002 and the SEC's issuance of Compliance & Disclosure Interpretations (C&DIs) in 2010. Similarly to Kolev et al. (2008) and Kyung (2014), we find (i) that both Regulation G and C&DIs are associated with an increase in the quality of non-GAAP earnings exclusions and, (ii) a decline in the probability of meeting or slightly exceeding analysts' forecasts when firms exclude positive non-GAAP exclusions. Moreover, we find (iii) a reduction in the earnings response coefficients (ERCs) during the post-C&DIs period, but an increase in the post-Regulation G period. This study contributes to the voluntary disclosure literature by providing evidence on whether Regulation G and C&DIs have encouraged informative or opportunistic non-GAAP earnings. Furthermore, this study adds to the expansion regarding the regulation literature by highlighting the unintended economic consequences of regulation by regulatory bodies.

SEC interventions and the frequency and usefulness of non-GAAP financial measures

Review of Accounting Studies, 2006

This paper examines the effect of two Securities and Exchange Commission regulatory interventions related to disclosure of non-GAAP financial measures. There are three main results. First, the probability of disclosure of non-GAAP earnings declines in 2003, but the probability of disclosure of other non-GAAP financial measures has an accelerated decline after the first intervention. Second, all else equal, after Regulation G, investors have a positive market reaction to the disclosure of non-GAAP earnings. Finally, investors react to the adjustments made by I/B/E/S financial analysts as they do to the GAAP surprise, but they do not react to the additional adjustments made by firms.