Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings

Batta, George E.; Muslu, Volkan

doi:10.2139/ssrn.1756945

Cited by 8 publications

(9 citation statements)

References 98 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…While early empirical evidence (both experimental and archival) suggests that less sophisticated investors are more likely than sophisticated investors to rely on non‐GAAP information (Allee et al., ; Bhattacharya et al., ; Elliott, ; Frederickson & Miller, ), subsequent research has found evidence that many different stakeholders (who are presumably “sophisticated”) rely on non‐GAAP performance metrics. For example, sell‐side analysts revise their forecasts based on non‐GAAP information (Bhattacharya et al., ), credit analysts use adjusted performance metrics (Batta & Muslu, ), compensation committees evaluate directors and executives based on non‐GAAP earnings targets (Black et al., ; Curtis et al., ), creditors evaluate borrowers based on non‐GAAP performance metrics (Christensen et al., ; Dyreng et al., ), and short sellers view non‐GAAP earnings numbers as a red flag indicating declining performance and lower quality reporting (Christensen et al., ; Bhattacharya et al ). Recent research has focused on various stakeholders, but a fundamental question with respect to investors is whether early evidence indicating that non‐GAAP reporting differentially influences less sophisticated investors still applies today.…”

Section: Future Research On Non‐gaap Reportingmentioning

confidence: 99%

See 1 more Smart Citation

Non‐GAAP reporting: Evidence from academia and current practice

Black

Christensen

Ciesielski

et al. 2018

Business Fin & Account

187

136

View full text Add to dashboard Cite

The number of firms reporting earnings on a non-GAAP basis has increased dramatically over the last decade, and non-GAAP reporting is now commonplace in capital markets. This proliferation of non-GAAP reporting has renewed both regulators' and standard setters' interests in these alternative performance metrics. For example, the SEC, FASB, and IASB have all recently questioned what this increasing reporting trend means for IFRS-and US-GAAP-based reporting and whether these measures are misleading to investors. This increasing focus on non-GAAP metrics motivates us to synthesize the nearly two decades of research on non-GAAP reporting to provide insights on what academics have learned to date about this reporting practice. Then, we utilize a novel dataset of detailed non-GAAP disclosures to provide new descriptive evidence on current trends in non-GAAP reporting and its recent proliferation. Finally, we discuss important questions for future researchers to consider in moving the literature forward. K E Y W O R D Snon-GAAP earnings, regulation, standard setting INTRODUCTIONManagers, financial analysts, investors, lenders, compensation committees, and other stakeholders often evaluate a company's earnings performance using metrics other than GAAP-based net income. These stakeholders generally start with GAAP earnings and back out (or exclude) earnings components that they deem to be transitory or noncash. They argue that these excluded items are less relevant for assessing firm performance and that the "non-GAAP" performance number is more appropriate for their intended purposes. The growth in these non-GAAP metrics over the past 20 years reflects a widespread acceptance of non-standard performance metrics as a way to evaluate firm performance.Although skeptics have frequently viewed non-GAAP disclosure as a threat to the traditional GAAP-based income statement, regulators recognize that non-GAAP metrics can be informative to investors and have laid the groundwork for firms to disclose these metrics in a transparent manner. Standard setters and regulators have recently renewed J Bus Fin Acc. 2018;45:259-294. wileyonlinelibrary.com/journal/jbfa

show abstract

Section: Future Research On Non‐gaap Reportingmentioning

confidence: 99%

“…Interestingly, different kinds of analysts have non‐overlapping incentives for excluding earnings components. Batta and Muslu () find that credit rating agency and equity analysts make different adjustments that reflect their clienteles, with debt rating analysts making lower (more conservative) adjustments than equity analysts.…”

mentioning

confidence: 99%

Non‐GAAP reporting: Evidence from academia and current practice

Black

Christensen

Ciesielski

et al. 2018

Business Fin & Account

187

136

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,

Kim,

Park

et al. 2020

SSRN Journal

View full text Add to dashboard Cite

We examine whether the reiteration of past credit ratings (i.e., credit rating affirmation) provides value-relevant information to equity analysts and stock investors. While a large body of accounting and finance research provides evidence on the informational role of credit rating downgrades and upgrades, the informational effects of credit rating affirmations remain unexplored, despite the fact that the frequency of issuing rating affirmations is 1.6 times greater than that of issuing both rating downgrades and upgrades. Using a sample of US corporate credit rating reports that reiterate the previous credit ratings over the period of April 1995-June 2018, we find that equity analysts' earnings forecast dispersion and stock return volatility-proxies for information uncertainty-decrease within a 30-day window following the credit rating affirmation announcements. The reduction in information uncertainty after rating affirmation is mainly driven by firms with non-investment grade bonds, whereas such reduction is not statistically significant for firms with investment grade bonds. We next find that the stock market reaction to affirmations is significantly positive on average and the positive reaction is most pronounced for firms with non-investment grade bonds.Taken together, our findings suggest that credit rating affirmations reduce information uncertainty and stock market investors find it useful for their investment decisions, particularly for firms with non-investment grade bonds. This study enhances our understanding of the non-trivial informational value of the credit rating affirmations for equity market participants.

show abstract

“…First, credit markets are a key source of capital for firms, and non-GAAP disclosure plays a fundamental role in facilitating borrowers' access to credit. Anecdotal evidence and research both suggest that the information needs of equity and debt investors differ and that credit events affect the characteristics of non-GAAP earnings (Batta and Muslu [2017], Christensen et al [2019], Dyreng et al [2017], Kraft [2015], Thielemann et al [2019]). Second, reporting non-GAAP earnings has become the norm, rather than the exception (Black et al [2020]).…”

Section: Introductionmentioning

confidence: 99%

“…Proponents argue that, compared to GAAP earnings, non-GAAP earnings are more value-relevant, more predictive of future performance, and do not significantly impair earnings consistency and comparability, on average (Bhattacharya et al [2003], Black et al [2020], Bradshaw and Sloan [2002]). Consistent with this view, firms frequently supplement their financial reports with non-GAAP metrics (Black et al [2020]), both equity and credit analysts adjust GAAP metrics in assessing firm performance (e.g., Batta and Muslu [2017], Gu and Chen [2004]), and accounting standard setters have noted non-GAAP earnings could be a laboratory for improving current GAAP (Black et al [2019], Golden [2017], Hoogervorst [2015]).…”

Section: Introductionmentioning

confidence: 99%

Credit Default Swaps and Non-GAAP Earnings Disclosure.

Black¹

2020

Preprint

View full text Add to dashboard Cite

We examine the effect of credit default swap (CDS) coverage on voluntary disclosure using firmprovided non-GAAP earnings as a laboratory. For a large sample of U.S. firms, we find that for companies with CDS coverage, the persistence of non-GAAP exclusions is lower, implying higher disclosure quality. The effect manifests across a range of performance measures and measurement windows and is strongest among non-investment-grade firms, entities for which monitors are more likely to rely on public accounting reports. This improvement in quality comes as a counterpoint to a decrease in the frequency of non-GAAP disclosure among firms that experience CDS coverage initiation. Collectively, our findings suggest firms counteract the perceived negative externalities associated with CDS coverage with higher-quality voluntary disclosure.

show abstract

Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings

Cited by 8 publications

References 98 publications

Non‐GAAP reporting: Evidence from academia and current practice

Non‐GAAP reporting: Evidence from academia and current practice

Information Content of Credit Rating Affirmations

Credit Default Swaps and Non-GAAP Earnings Disclosure.

Contact Info

Product

Resources

About