No. 1: Buffering or Backfiring? Non-GAAP Reporting and Investor Reactions to Material GAAP Restatements

Abstract

We examine the costs and benefits of non-GAAP reporting in the context of firm-specific credibility shocks—events that undermine investor trust, erode shareholder value, and potentially lead to a revision of prior non-GAAP disclosures. Using an event-study design centered on material GAAP restatements, we find that firms disclosing non-GAAP earnings prior to the restatement experience significantly milder negative market reactions than those that do not (i.e., GAAP-only reporters), consistent with a credibility-driven “buffering” effect. However, this benefit reverses, as evidenced by more negative market reactions, when managerial non-GAAP exclusions exceed those implied by analysts, consistent with a “backfiring” effect for aggressive non-GAAP reporting choices. Our findings are consistent with the view that the benefits of non-GAAP reporting extend beyond regular earnings releases, unless the disclosures are perceived as aggressive, in which case they amplify investor penalties. This paper informs investors, managers, and regulators about the informational benefits of non-GAAP disclosures and the conditions under which these benefits may no longer hold.