No. 1: Does learning about low GAAP reporting quality change investors’ perceptions of aggressive non-GAAP reporting choices?

Abstract

Material financial restatements reveal GAAP-based misreporting and thus are a strong signal of low GAAP reporting quality. We explore these reporting shocks and investigate whether heightened investor scrutiny of GAAP reporting quality after material restatements has a spillover effect on investors’ perceptions of aggressive non‑GAAP reporting choices. We find that investors reward aggressive non‑GAAP reporting choices before material restatements (i.e., ERC premium) but penalize the same reporting choices after material restatements (i.e., ERC discount). Furthermore, we document that short- and long-term market reactions to material restatements are more negative for firms that aggressively reported non‑GAAP earnings before the announcement of material restatements. We provide evidence that heightened investor scrutiny of GAAP reporting quality affects investors’ perceptions of aggressive non‑GAAP reporting choices. Finally, our findings are consistent with the idea that aggressive non‑GAAP reporting choices misled investors before material restatement announcements.