Disentangling Managers’ and Analysts’ Non‐GAAP Reporting

Abstract

Researchers frequently proxy for managers’ non‐GAAP disclosures using performance metrics available through analyst forecast data providers (FDPs), such as I/B/E/S. The extent to which FDP‐provided earnings are a valid proxy for managers’ non‐GAAP reporting, however, has been debated extensively. We explore this important question by creating the first large‐sample data set of managers’ non‐GAAP earnings disclosures, which we directly compare to I/B/E/S data. Although we find a substantial overlap between the two data sets, we also find that they differ in systematic ways because I/B/E/S (1) excludes managers’ lower quality non‐GAAP numbers and (2) sometimes provides higher quality non‐GAAP measures that managers do not explicitly disclose. Our results indicate that using I/B/E/S to identify managers’ non‐GAAP disclosures significantly underestimates the aggressiveness of their reporting choices. We encourage researchers interested in managers’ non‐GAAP reporting to use our newly available data set of manager‐disclosed non‐GAAP metrics because it more accurately captures managers’ reporting choices.

Non‐GAAP Earnings Disclosure in Loss Firms

“…In panel B, non‐GAAP profit firms are from the data set shared by Bentley et al. [] (BCGW) for observations with nonnegative income before extraordinary items and operating earnings. The BCGW data are available through https://sites.google.com/view/kurthgee/data.…”

The Effect of Regulation on the Timeliness and Informational Role of Earnings Announcements

“… The independent variable NG is simply a proxy for the disclosure of street earnings used extensively in prior research (e.g., Kolev et al ) and is not identical to the hand‐collected non‐GAAP earnings disclosure variable, PR , described later, and used in other research (e.g., Black et al ). Additionally, Bentley et al () had identified the frequency at which the proxies used in prior literature likely diverge from the actual management disclosures. As the content of earnings announcements is not the primary focus of this study, I rely on the proxy most widely used in the published literature. …”

The Roles of Data Providers and Analysts in the Production, Dissemination, and Pricing of Street Earnings

“…Managers, analysts, and FDPs have wide discretion in determining which earnings components to include/exclude in street earnings calculations. As a result, a number of prior studies have examined managers' and analysts' non-GAAP discretion and reporting incentives (e.g., Christensen et al, 2011;Barth et al, 2012;Doyle et al, 2013;Bentley et al, 2018). In addition, there is a large literature analyzing market reactions to GAAP and non-GAAP earnings surprises (e.g., Bradshaw and Sloan, 2002;Brown and Sivakumar, 2003;Bhattacharya et al, 2007).…”