Impression Management and Non‐GAAP Disclosure in Earnings Announcements

Abstract

We study the market's reaction to the disclosure of non‐GAAP earnings measures that are combined with high impression management. We construct an impression management score that captures several communication techniques that managers often use to positively bias investors’ perceptions of firm performance. We hand‐collect and code both quantitative and qualitative information from earnings announcement press releases of large European firms. Our results indicate that non‐GAAP measures are informative to capital markets. However, non‐GAAP adjustments are more persistent when accompanied by higher levels of impression management. This evidence is consistent with managers attempting to distort users’ perceptions when non‐GAAP adjustments are of lower quality. Market reaction tests suggest that investors are able to see through managers’ intentions and discount non‐GAAP information that is accompanied by high impression management. Moreover, investors in more sophisticated markets penalize non‐GAAP measures communicated with high impression management. Our results are robust to a battery of sensitivity tests, including the use of a machine‐coded tone measure.

Non‐GAAP Earnings and the Earnings Quality Trade‐off

“…Guillamon‐Saorin et al . () reach a similar conclusion. They show that exclusions from non‐GAAP earnings voluntarily disclosed by European firms are more persistent when a broader measure of impression management is also high.…”

“…Managers’ ‘undoing’ of mandated GAAP to create non‐GAAP performance measures brings into question the extent to which such disclosure may be self‐serving, rather than incrementally informative. Prior empirical research offers at least some evidence that non‐GAAP disclosures are opportunistic, as evidenced by managers using these measures to meet earnings benchmarks (Bhattacharya et al ., ; Heflin and Hsu ; Black and Christensen, ; Black et al ., ) or otherwise influence investor perceptions (Guillamon‐Saorin et al ., ). Similar sentiment has been expressed by accounting standard setters, who not surprisingly have recognized the increasing frequency of non‐GAAP earnings disclosures as a challenge (Hoogervorst, ; IASB, 2017).…”

The Effect of Corporate Governance on Earnings Quality and Market Reaction to Low Quality Earnings: Korean Evidence

“…In contrast, foreign investors have a different strategy for discipline management, that of 'exit' [27,28] because they can significantly affect stock prices through trading [2,29]. Given that sophisticated investors tend to penalize firms when signals cause them to change their belief regarding earnings quality [30][31][32], a firm's earnings quality revealed after amendment might affect foreign investors' beliefs, resulting in sales of their shares. In particular, foreign investors penalize firms more severely for deteriorated earnings quality because they have a limited source of information and are more likely to rely on publicly disclosed information [18].…”

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

“…The voluntary disclosure of manager-adjusted non-GAAP (or "pro forma") earnings numbers in earnings press releases has attracted considerable attention during the last decade in the United States and increasingly in Europe (e.g., Black & Christensen, 2009;Choi, Lin, Walker, & Young, 2007;Guillamon-Saorin, Isidro, & Marques, 2014). Prior research suggests that some managers report these adjusted numbers to better reflect sustainable core earnings, while others may disclose adjusted earnings metrics to overstate operating results (e.g., .…”