Credit Rating Agency and Equity Analysts’ Adjustments to <scp>GAAP</scp> Earnings

For more than two decades, the reporting of so-called ‘alternative performance measures’ (APMs) has been a common phenomenon in external financial reporting. APMs are voluntarily disclosed and generally unaudited performance measures. Typically, APMs modify earnings measures calculated in accordance with generally accepted accounting principles (GAAP) by (subjectively) adjusting certain earnings components. In the academic literature, with the information motive on the one hand and the motive of (adversarial) investor influence on the other hand, two alternative explanations for the voluntary reporting of alternative performance measures are discussed, which are difficult, if not impossible, for external stakeholders to disentangle. Taking into account the recent developments in more than 250 published articles in the last decade, this paper critically reviews a wide range of literature from the United States (U.S.), Europe and, to a less extent, Australia/Asia. In particular, we analyse a comprehensive sample of more than 400 research papers published in academic and professional journals as well as other publications which are important in the academic discourse. The purpose of this paper is to identify relevant research gaps that provide starting points for future research. For this purpose, our methodological approach strictly follows structured literature review (SLR) methodology in order to minimise researcher idiosyncrasies. Thus, our SLR facilitates a decided derivation of research gaps based on a reliable and valid analytical framework which has been deductively derived from previous research.

show abstract

“… 2010 ) and differences between APMs and street earnings (e.g., Bentley et al. 2018 ; Batta and Muslu 2017 ).…”

Section: Results: Insights and Critiquementioning

confidence: 99%

Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals

Herr

Lorson

Pilhofer

2022

Schmalenbach J Bus Res

View full text Add to dashboard Cite

show abstract

“…Further analysis shows that the mean and median earnings forecast revisions are significantly negative to rating affirmations in all prior rating categories. One plausible explanation for this result is that since credit rating agencies are more conservative in terms of interpreting firm performance than equity analysts (Batta and Muslu, 2017), rating affirmations play some role in correcting equity analysts' optimism underlying their earnings forecasts.…”

Section: Earnings Forecast Revision To Rating Affirmationsmentioning

confidence: 99%

Information content of credit rating affirmations

Jung,

Kausar,

Kim

et al. 2024

Contemporary Accting Res

View full text Add to dashboard Cite

We examine the economic determinants and informational effects of credit rating affirmations (i.e., the reiteration of past credit ratings) for a sample of US public firms from 1995 to 2020. We find that credit rating affirmations typically follow major corporate events and changes in firm fundamentals that increase information uncertainty about a firm's creditworthiness, suggesting that affirmations reduce uncertainty. We further document that rating affirmations provide value‐relevant information to equity and debt investors. Using a short‐window event study method, we show that equity investors react positively to rating affirmations and that information uncertainty around affirmations diminishes. These findings are more pronounced for firms with non‐investment‐grade ratings. We further show that our results strengthen for firms with greater pre‐affirmation information uncertainty. Finally, consistent with our information uncertainty reduction results from the stock market, we report that bond yield spreads decrease for affirmed firms. Again, the effect is more pronounced for firms with non‐investment‐grade ratings. In summary, we highlight the significant capital markets’ effects of credit rating affirmations, an area that the literature has largely ignored.This article is protected by copyright. All rights reserved.

show abstract

“…Not that the difficulty has stopped standard-setters from trying, as the long-running shown to be superior to GAAP earnings. Batta and Muslu (2017) find that credit rating agencies make adjustments that better predict bankruptcies. Industry-specific metrics are also shown to provide decision-useful information, for example, funds from operations for real estate investment trusts (Baik et al, 2008), distributable cash for income trusts (Cormier et al, 2011), and revenuepassenger-miles for airlines (Francis et al, 2003).…”

Section: Informative Motivationsmentioning

confidence: 99%

Happy 20-year anniversary non-GAAP earnings: a systematic review of the literature

Brosnan,

Duncan,

Hasso

et al. 2023

JAL

View full text Add to dashboard Cite

PurposeIt has been two decades since the first academic paper shone a spotlight on non-GAAP earnings. The past 20 years of research investigates concerns over the misuse of these disclosures and resulted in some significant changes to accounting and reporting standards across the globe. This paper aims to document the history of non-GAAP reporting and outline the emerging themes of the now matured practice of non-GAAP reporting.Design/methodology/approachThis systematic literature review searches two popular databases to identify the academic publications relating to non-GAAP reporting between 2002 and 2022. The paper uses bibliographic mapping to present the key statistics of the non-GAAP reporting field of research.FindingsThe non-GAAP reporting environment started out as the “wild West’ but, through regulation and public awareness, emerged as an important supplement to the traditional outputs of financial reporting. Current consensus is recent non-GAAP earnings are informative to users but there is lack of research into qualitative non-GAAP disclosures and the vast body of archival research needs triangulating with more experimental studies.Originality/valueThis paper contributes to the literature by documenting the past 20 years of non-GAAP reporting and identifying the important existing and emerging research areas concerning non-GAAP earnings disclosures.

show abstract

Credit Rating Agency and Equity Analysts’ Adjustments to GAAP Earnings

Cited by 13 publications

References 94 publications

Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals

Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals

Information content of credit rating affirmations

Happy 20-year anniversary non-GAAP earnings: a systematic review of the literature

Contact Info

Product

Resources

About