No. 69: Does non-GAAP reporting change after financial restatements?

Abstract

I investigate changes in non-GAAP reporting following financial restatements—firms’ revelations of past GAAP reporting failures. As managers may feel more constrained in GAAP than in non-GAAP earnings management after financial restatements, they may increase their use of inappropriate non-GAAP adjustments, leading to a deterioration in non-GAAP reporting (substitution effect).
Contrary to this substitution effect, I find that the i) likelihood of recurring expense exclusions decreases and that the ii) quality of recurring expenses increases after material restatements, suggesting a post-restatement improvement in non-GAAP reporting. My findings are consistent with managers’ desire to regain investor trust and rebuild reputation (signaling view). Alternatively, this improvement could be attributed to managers’ assumption that heightened investor scrutiny after material restatements improves investors’ ability to distinguish between informative and inappropriate non-GAAP adjustments (expected payoff effect). My results support the view that investor scrutiny over GAAP reporting is one determinant of firms’ non-GAAP reporting choices.

Beteiligte Institutionen

Die Hauptstandorte vom TRR 266 sind die Universität Paderborn (Sprecherhochschule), die HU Berlin und die Universität Mannheim. Alle drei Standorte sind seit vielen Jahren Zentren für Rechnungswesen- und Steuerforschung. Hinzu kommen Wissenschaftler der LMU München, der Frankfurt School of Finance and Management, der WHU – Otto Beisheim School of Management, der ESMT Berlin, der Goethe-Universität Frankfurt und der Carl von Ossietzky Universität Oldenburg, die die gleiche Forschungsagenda verfolgen.